Have you ever wondered why older people seem to have higher credit scores? The answer lies in how average credit age is determined and what it means to a person’s credit scores.
Credit scores establish the age of credit accounts by calculating both the average age of all accounts, as well as the time the oldest account has been open. Credit bureaus weigh credit scores this way because a good payment history over a long period provides a better indicator of reliability than one over a shorter period.
Because older people often have accounts that are decades old, it’s difficult for younger people to compete on this metric. In fact, a credit score over 800 is impossible for young people to attain unless they employ the credit piggybacking strategy to maximum effect.
The FICO™ scoring model bases 15% of credit score on the age of accounts, while VantageScore combines account age and the mix of credit account types (credit cards, installment loans, etc.) into one metric.
VantageScore does not disclose the exact weight of this metric but terms it “highly influential.” As a result, the length of credit history and average credit age makes the difference between low and medium scores and medium and high scores.
These two terms sound the same, but there are critical differences. The “length of credit history” refers to how long accounts have been open. A long perfect payment history results in hugely positive credit scores in both FICO™ and VantageScore ratings.
To determine credit age, scoring algorithms add up the ages of all accounts and divide them by the number of accounts. For example, if you have four accounts that are one, two, three and four years old, the credit age calculation would go like this:
1 + 2 + 3 + 4 = 10/4 = 2.5.
The average age is 2.5 years.
To demonstrate the importance of having older accounts, let’s see what happens if we add a fifth account that has a 20-year payment history:
1 + 2 + 3 + 4 + 20 = 30/5 = 6.
The “average age” is astonishingly improved at six years. In addition, the “length of credit history” also increases to 20 years. This explains why younger people have lower credit scores compared to older people, when all other variables remain the same. Is there a way that people with a low length of credit history and credit age can bridge this gap? Yes, thanks to tradelines from BoostMyScore, young people can now improve these metrics to help boost their credit scores.
Credit piggybacking means being added onto a credit card account as an authorized user. Authorized users receive credit for the account’s entire history, regardless of when they were placed on the account.
For instance, as in the above example, if you were placed as an authorized user on an account with a 20-year history, your average age would increase from 2.5 years to six years and your length of credit history to 20 years. Within one billing cycle this change could boost your score to the next level.
If you have a low credit age, it’s nearly impossible to qualify for the best interest rates or the top-tier rewards cards. Many mortgage and auto loan programs also require a minimum number of “seasoned tradelines”. Tradelines are accounts reflected in credit bureaus and “seasoned” refers to accounts that are more than two years old.
Low numbers of seasoned accounts sink credit scores. An average age of more than two years is essential for a high credit score, and an average age over five years could boost scores to the next level.
Credit piggybacking is a proven method of boosting credit scores that has existed since the 1970s. It allows those with negative or insufficient credit history to stop being punished with higher interest rates and fees.
Are you ready to take control of your future? Call BoostMyScore at 1-800-531-1472 to talk to a credit building specialist.