For many Americans, the mystery behind their credit score runs deep. Not only are there numerous scoring models in use, but no one really knows exactly how their number is calculated.
There are a few things that we do know: these scores are important and we should work to keep the number as high as possible. Factors like balances held and credit utilizations matter. And you can even see an impact from the number of credit inquiries you’ve had in recent years. But does your age matter at all?
Well, it does and it doesn’t. While your age is not an explicit part of any credit scoring model, it does come into play in a surprising number of ways.
Let’s take a look at how your birth year can affect your credit score, and what you can do about it.
Your Credit Mix
One aspect of a healthy credit score is having a well-balanced “credit mix.” This means that you are familiar with, and have responsibly managed, a number of different types of credit over the years. Unfortunately, the younger you are, the less varied your credit mix is likely to be.
Your credit mix includes revolving debt, such as a credit card account, where the balance can go up and down according to your spending habits. It also includes installment debt, such as an auto loan or financed purchase, where you are paying down an initial purchase but never adding to the balance.
Your credit mix can also include a home mortgage and student loans, both of which are in their own unique categories. These types of loans typically take decades for repayment, and their impact on your credit score is different than other debts.
Your credit mix will inevitably improve over the years as you open new accounts, buy a home and/or finance a car, or pay down student loans. The younger you are, though, the less likely you are to have checked these unique credit-related boxes… and the less of a positive impact your credit mix can have on your score.
Your Average Age of Accounts
Approximately 10% of your FICO credit score is comprised of your average age of accounts, or AAoA. This number is simply an average, drawn from all length of time you’ve held each of the accounts on your credit report.
The higher this average, the longer you’ve been responsibly managing your credit… and the better your score will be for it. However, this is yet another aspect of your credit score that will only improve with time.
If you’re 22-years-old, it’s impossible for you to have an average age of accounts in the teens or 20-year range. After all, you’ve only been building your credit and managing your own accounts for a handful of years, and have what’s called a “thin file.”
However, the longer you keep these accounts open and in good standing, the higher this average will climb. This only happens with time (ie: age) and intentional credit moves on your part, such as limiting the number of new accounts you open.
Your Utilization
Younger adults typically have lower credit scores, just due to their limited history and lower incomes. Even with a good credit score, lenders may be wary about offering you high credit limits or even approving you for certain products, until you’ve proven yourself for a few years.
As a result, you probably don’t have a substantial credit limit to your name. While a credit card issuer might be willing to offer a $30,000 limit to your parents – with their income and credit history as factors – you might be limited to maybe $2,000. And this can be detrimental to your credit utilization.
If you charge $1,000 to that card, your credit utilization is a whopping 50%. Considering that the recommended utilization is below 30%, this number will set off red flags… and ding your score.
Until your credit limit slowly increases over time, you’ll need to be careful about the balances you carry, and how they will impact your utilization.
Negative Reports
Having a negative report in your credit history is never healthy for your score. But when you already have a limited history due to your age, the effects can be even more impactful.
Let’s say that you’ve only had your first credit card for four months. You completely forget about your card’s due date one month and wind up with a late payment on your credit history. Oops!
While that same late payment notation would cause a drop in credit score for anyone, it’s particularly damaging for you. After all, in your case, you’ve now been late for one-fourth of your reported payments! That can be a serious red flag to lenders, and a big score crusher.
The same goes for other negative reports, such as accounts that get charged off or go to collections, or even a large number of hard inquiries. When you are young and still have a limited credit history, it’s especially important to avoid the negative reports.
While your age is not a direct factor in calculating your credit score, it can easily have an indirect impact. Thanks to the nature of your credit history, and how it’s analyzed, being young is an automatic downside. With the right credit choices and time, though, you will quickly see your score improve.
