We often find that many aspects of the aging process are unattractive. This, however, is not the case when it comes to credit. As credit ages it benefits a consumers credit score more and more. As a matter of fact the older the average age of credit the more it can increase the individuals Fico score.
Why is this so? If you were going to hire a plumber, contractor, or maybe a surgeon would you want the new kid on the block? Very doubtful. Most people want a professional who has a bit of experience or shall we say a lot of practice. The reason is the more you practice something the better chance you have at mastering it. This is the same for credit. The Fico score looks more kindly at those who have been in the game the longest. For example with young credit, even though the credit holder may have 5 accounts that have always been paid on time, since the average age is 15 months the score will not be very high. On the other hand if the average age was 15 years, with excellent credit history you might see a difference of 50-100 points depending on the overall credit picture.
Since average age of credit impacts the score positively it is important that the younger generation starts to build credit as early as possible and for the rest of us we must be careful about closing credit. Although closing credit does not initially take away from average age, once the creditor deletes the account the age of that account will no longer be a factor when the score is calculated. Closed credit can be deleted from profiles 2 years after inactivity. In many cases closed credit shows up for a much longer period of time since creditors are not motivated to remove it, but if it does come off after the two year inactivity period it can hurt credit scores.
We have seen in many cases a young consumer may have accounts on their credit that are really belonging to a parent with the same or similar name. Since the two individuals have a name and address in common the bureaus are confusing the two. This could be of great benefit to the younger of the consumers since they may have a 20-30 year old account added to their score, gaining an increased score threshold, which ultimately is saving them in monthly mortgage payments due to lowered interest rates.
How much could that really save them?
Let’s take John Jenkins Jr. who has 3 accounts of credit in his name with no late payment history and low balances on his credit cards.
1. Amex – date opened 7/2010
2. Toyota car loan – date opened 1/2010
3. Visa card – date opened 5/2011
With these three items Johns Fico score should be around a 680, but luckily John’s fathers 20 plus year old credit is mistakenly listed on his credit profile. Along with the accounts above, John’s credit now shows:
1. Amex – date opened – 1989
2. Diners – date opened – 1990
3. Mortgage – date opened – 1991 now closed
4. Lord & Taylor card – date opened 1985
With all of these old cards showing up on his report his score winds up to be a 760 which will save him $128,317 over the life of his 30 year $600,000 loan! That is a lot of money, so you can see how having old credit can really manifest in savings that could greatly impact your quality of life. For John, it equals a savings of $365 a month on mortgage payments.
Feel free to call us with any questions or feedback on credit challenged clients or credit in general!
Making sure credit is analyzed with future financial goals in mind is a MUST before taking an action that can foil those plans and limit a consumers options for a better quality financial life.
“Great credit brings great opportunity!!” Copyright 2012