So after payment history and the amounts owed on accounts, the third factor looks more at how long a person has been creditworthy.
15% OF YOUR CREDIT SCORE IS DETERMINED BY HOW LONG YOU'VE HAD CREDIT ESTABLISHED.
This doesn't mean how long you've had an actual credit report on file with the bureaus. The majority of people have had some kind of credit file since they were 18, so that would effectively amount to age discrimination if it were that simple. This factor looks at two main sub-factors: The average age of your accounts and also the age of your oldest account on your credit report.
The age of the oldest open account is something that people often overlook as being an important part of their credit score, and is also something that people can easily sabotage without ever realizing they are doing harm to their score. Often times, consumers run up rather large balances on accounts, such as credit cards, and may struggle for a long time to pay them off completely. When this happens, people are often elated and will sometimes close the account (or multiple accounts) to keep themselves from ever charging it back up again.
While this may be a good form of financial self-discipline, it's also a good way to drop your credit score by a substantial amount of points very quickly. Instead of closing the account, try cutting up the actual credit card if you are worried you might be tempted to use it. This will eliminate your ability to use the card most places, since the magnetic strip will be destroyed and other info, such as the expiration date and the three digit card security code.
The other factor, the average age of accounts, is affected whenever new accounts are opened or old accounts are closed. The effect of opening new accounts can be disheartening, but your credit score will eventually go back up within a few months as long as you keep the balances low and make all of your payments on time.
The age of your accounts is important, and it's a good reason why people with bad credit or no credit should consider getting a secured credit card to establish a credit history. The sooner you take the initiative to start rebuilding your credit, the sooner your credit score will get to a point where you can obtain competitive interest rates.
The spread (difference) between rates for good credit borrowers and rates for those with less than perfect credit is increasing dramatically because of the fiancial crisis. So the long term cost of having bad credit is increasing, despite the fact that interest rates are actually dropping.
So now we've covered three of the five factors that make up your credit score:
Payment history - 35%
Account Balances - 30%
Length of Credit History - 15%
These three factors make up 80% of your credit score. Obviously they are the most important ones, but two other factors are also considered that have a smaller but yet important impact. Now check out Part 4 of this series, which discusses the types of credit used.
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