Length of Credit History: How It Affects Your Credit Score
19 September, 2024 | 18:30 IST
The length of your credit history plays a big role in determining your credit score. Understanding how it impacts your credit score can help you make informed decisions about managing your finances and also help you maintain a good credit score.
Your credit history reflects the loans and other credit products you have availed till date. The age of your oldest credit account is an important factor in your credit history and it is likely to affect your credit score. Your credit history length, is determined based on the age of your oldest active credit account and the average duration of various credit accounts you hold.
Credit history is a record of all your borrowings. It contains information about your credit accounts, including credit cards, loans and other debts. This credit history shows how well you handle credit instruments, including how much debt you have and how quickly you make your payments. Your credit score — a number that indicates how creditworthy you are — is derived from your credit history.
Your credit history length is one of the major determinants of your credit score. In general, your credit score can benefit from having a longer credit history. Here’s why:
Shows your credit management skills: Your credit history length shows lenders your proficiency with credit management. It offers a more thorough picture of your long-term financial conduct. A long credit history shows that you have been managing your credit well for an extended period, which could be a positive indicator for prospective lenders.
Helps build a high credit score: A longer credit history adds value to your credit score since it contains more data points. Credit score models evaluate your creditworthiness more precisely with the help of this historical data.
Limited information: Credit scoring models can assess less information when a person has a shorter credit history. Your credit score may suffer due to inadequate information as the scoring models may not have enough data to properly evaluate your creditworthiness.
Higher risk perception: As credit history is an indicator of borrower’s financial behaviour, lenders may see borrowers with shorter credit history as risky customers. Getting credit or good interest rates may be more difficult as a result of this.
Possibility of higher interest rates: You may be viewed as a high risk borrower if your credit history is not available over a significant period. Consequently, you may face higher interest rates, get a lower amount or credit limit or less favourable terms on credit products.
Strong credit history: How to establish and maintain it?
Get started early: It is best to begin establishing credit as soon as possible. Even if you start with a small credit card or a manageable loan, it is important to begin building your credit history as early as possible.
Don’t delay bill payments: It’s important to always make your bill payments on time. Your credit score could be negatively affected due to late payments.
Keep old accounts open: If you have older credit cards, it is not a bad idea to keep those active. Closing old accounts can shorten your credit history and may reduce your credit score. However, do check the associated costs of keeping them. For example, if you have a lifetime free credit card, it won’t hurt to keep it active.
Make responsible use of credit: Refrain from using credit excessively. Avoid using all your credit cards at one go, as this will lower your credit usage percentage. Try not to utilise more than a modest percentage of your credit limit.
Keep an eye on your credit report: Check the accuracy of your credit report on a regular basis. Fraudulent or incorrect activity can negatively impact your credit score and history. You can check your credit report for free through online platforms like the Moneycontrol app and website.
Importance of a longer and detailed credit history
A longer and detailed credit history paints a more accurate image of your financial reliability. It’s not just about having a long credit history but also about demonstrating consistent and responsible credit use. Lenders prefer a detailed record that shows your ability to manage credit effectively over time.
Overall, your credit history length plays a major role in determining your credit score. A longer history with a track record of responsible credit management can positively impact your credit score. On the other hand, a shorter credit history could bring down your credit score. By understanding the importance of credit history length and implementing strategies to build and maintain it, you can enhance your creditworthiness and achieve better financial outcomes. Remember, you can get a free credit score and a detailed credit report on the Moneycontrol app and website, so don’t forget to keep track of your credit health.
Summary
A longer credit history, showing consistent and responsible management, can enhance your creditworthiness. It's essential to start early and monitor your credit report to build a strong credit history.
Disclaimer
This piece/article was written by an external partner and does not reflect the work of Moneycontrol's editorial team. It may include references to products and services offered by Moneycontrol.
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