Have you ever looked up your credit scores? It’s important to keep track of your credit scores as it can impact your ability to secure a job, rent an apartment, borrow money, or get a mortgage. There are many factors that can cause your credit scores to fluctuate, but one of the most misunderstood ones is the length of your credit history.
What Are Credit Scores?
A credit score is a tool used to determine a person’s likelihood to pay a bill or debt. A credit score can range anywhere from 300 to 900 and is calculated based on the information in your credit report.
Credit scores below 560 are considered poor and can affect your ability to borrow money because lenders will view you as high risk. On the other hand, credit scores of 660 and above are considered good to excellent. Canadians with these credit scores will typically have a much greater chance of being approved for credit and being offered higher limits and better interest rates.
Why Is The Length Of Your Credit History Important?
When it comes to the length of your credit history, lenders will consider the account that has been opened longest as well as the average age of all your open accounts. Lenders will look at your credit history to predict your future behaviour and decide whether to approve your application.
Accounts, in good standing, that have been open longer, will generally reflect more positively in your credit scores. Age isn’t everything though. If lenders see long-term accounts that are riddled with late or missed payments, your scores may be impacted negatively.
Opening And Closing Accounts
According to Equifax, you should keep your oldest account open, in most cases. They also suggest that since opening multiple credit accounts lowers your average account age, you should open as few as possible. Stick with what you really need. If creditors can see you have a long track record of using credit wisely, they’ll be more likely to approve you.
However, is it better to have a bad credit history or no credit history at all? Read this to find out.
What Age Does My Credit History Need To Be?
It’s always best to have accounts, with a variety of ages, in your credit file, but it is important to have an account or two that are significantly older. If you have accounts with an average age of 5 years, you’re likely in good shape. But of course, longer is typically better. So If the average age of your accounts is ten years, you definitely can consider yourself to have a long credit history.
Should You Close Your Credit Card Account?
When you pay off a debt, such as a credit card, you might be tempted to close that account to clean up the clutter in your credit file. You might want to think twice, if it’s one of your oldest accounts, especially if you’ve used it responsibly. Closing older accounts will lower the average age and might reduce your credit scores.
How The Length Of Your Credit History Can Affect Your Ability To Qualify For Different Credit Products
The age of your credit accounts may be more important to some lenders than others. Here’s how the length of your history applies to different products:
If you are hoping to purchase a home with little or no credit history, it can be tough, especially if you are approaching the Big 5 banks with your mortgage application. Banks tend to have more stringent requirements than mortgage brokers and online lenders, but if you have at least a year of history, you may be able to pull it off.
Again, it will depend on the lender, while some will require a long credit history, others may not even check your credit. In that case, you won’t have to worry about how old your accounts are.
Line of Credit
With a line of credit, you might have a little more difficulty getting approved, especially if you are looking for a higher credit limit or a lower interest rate. If you have an average credit history between 3 – 5 years, you’ll have a better chance of negotiating the line of credit you want.
A credit card is a great place to start when you’re trying to build a credit history. Most consumers can get approved for one without a credit history.
Like credit cards, car loans don’t usually require a long credit history since it is secured. Your approval will generally depend on your income level and overall credit health, but 12 months of credit history should be adequate. Because car loans are easy to qualify for, they’re generally a good option if you are trying to rebuild credit.
How To Improve The Age Of Your Credit History
If you have no credit history, taking out a small personal loan or applying for a credit card can help you start building your credit history. If you have poor credit, jump-start its improvement by using credit wisely and responsibly. If you are having difficulty being approved for a traditional loan, there are options to help you get started.
- Open A Low-Cost Cellular Phone Account – Certain cell phone accounts do show up on Equifax and TransUnion reports. You don’t need to choose the biggest and the best. An inexpensive phone with a monthly plan you can manage is all you need. If you stay with the same company for a long time, it can help increase the average age of your accounts.
- Apply For A Secured Credit Card – Secured cards offer you credit, up to a certain limit, when you provide a deposit to be used as collateral. Secured credit cards can help you improve the average age of your credit accounts when you use them and pay them according to the terms of your agreement.
Other Common Factors That Can Affect Your Credit Scores
While there are many different credit scoring models, these are some common factors that are used when calculating your credit scores, aside from your credit history length, which generally carries a weight of ~15%.
- Payment History (~35%) – How often you pay your bills on time and the frequency of late or missed payments can also affect the calculation of your credit scores.
- Debt-To-Credit Ratio (~30%) – The higher your debt level, the greater risk you represent to lenders. Keeping your debt under 35% of your total credit limit may help keep your score healthy.
- Number of Inquiries (10%) – The number of times you apply for new credit may affect your credit scores. Several inquiries within a short period of time can impact your scores in a negative way. However, soft inquiries such as you checking your own credit will not impact your credit scores.
- Public Records (~10%) – Public records such as previous bankruptcies, consumer proposals, liens, lawsuits and accounts in collections can impact the calculation of your credit scores.
Where Can You Check Your Credit Scores In Canada?
There are many credit score providers in Canada. While some are free, others charge a small monthly fee for you to access it.
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Remember, if your credit scores aren’t as high as you would like it to be, you can always make changes to improve it. The best way to improve your credit scores is to use credit responsibly over time.
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