Which Credit Factor is More Important to My Overall Score?
TPG reader Kevin emailed me to ask about credit scores:
I have two conflicting dings on my credit report: a low average age of accounts, and a low number of accounts. If I add more accounts, the average age will go down, so will it help me or hurt me overall?
For people without a lengthy credit history, building credit is a bit of a Catch-22. On one hand, you need good credit to get approved for many of the top credit card offers and other accounts; on the other hand, you need those accounts to establish good credit in the first place. Fortunately for Kevin and others in his situation, the average age of your accounts is less crucial than how well you manage them.
There are a number of factors that go into your credit score. The most important is your payment history, which looks at your track record of making payments and whether you have any negative marks on your report. Almost equally important is the amount you owe — this is often measured by your utilization ratio, which compares the amount of debt you have to your credit line (both on your individual accounts and overall). Those factors comprise 65% of your credit score, whereas the length of your credit history makes up just 15%. If you consistently pay bills on time and don't borrow too much at once, you'll generally be in good shape.
Having only a small number of accounts doesn't necessarily hurt your score, but it likely corresponds to a higher utilization ratio, since that ratio goes down as your borrowing capacity increases. For that reason, adding a new account is more likely to help your credit rating than harm it. I'm not suggesting you go on a spree and try to open 10 new accounts at once just to boost your total available credit, but your relative lack of credit history shouldn't be too much of an obstacle so long as the rest of your financial house is in order.
One strategy that can help boost the average age of your accounts is to become an authorized user on someone else's card, in particular one that has been open for a long time. Once you've been added by the primary cardholder (making sure to include your Social Security Number), then the account should eventually show up in your credit report. Essentially, you get to share that portion of their credit history even if you never use the card. Of course, that means you could also end up sharing any missed payments or other negative marks, so you should only consider doing this with someone you trust fully, and who manages their finances well.
Check out these posts for more information on building and managing your credit:
- 5 Things to Understand About Credit Before Applying for Cards
- Travel Rewards Strategies for People with Low Credit Scores
- Your FICO Score and Which Credit Cards Offer It Free