Length of Credit History is Too Short |
By Kenneth Long on June 28, 2010
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When creditors evaluate your credit applications, they are looking for positive repayment habits. While bad credit can block new credit, having too short a credit history can also prevent many types of credit applications from being approved.
This may appear as "length of time accounts have been established." This is referring to your overall credit history and includes all types of credit accounts. There is a related risk code that penalizes you if your credit history on revolving accounts is too short.
What lenders are essentially looking for is an established credit history where there is clearly a proven track record of paying accounts on time. The longer your credit history, the easier it is for lenders to predict your future repayment of a credit account. Duration of credit history accounts for 15% of FICO credit scoring formulas.
Many consumers mistakenly believe that having limited credit is the same as having bad credit. This is not true. Bad credit proves that you have failed to uphold your end of a credit contract. A short credit history only means that you have yet to prove anything, good or bad.
Some lines of credit will be completely off limits when you have a brief credit history. This may include certain mortgage products or preferred credit card products.
Other lines of credit may still be available to you. Store cards or secured credit cards may still be an option for you if you have yet to establish a lengthy credit history.
When you are approved for credit, it is likely that your lack of an established credit history will result in higher interest rates. Lower rates will become available as you prove your creditworthiness.
This higher cost is similar to the increase that an inexperienced driver has to pay when purchasing car insurance. They have made no driving errors, yet they must pay more because their classification is that of a riskier group.
Inexperienced borrowers tend to have high rates of default and missed payments. Even if you never miss a payment, you will still have to borrow at higher rates initially until you can prove that you are a low risk to the lender.
When you carry the short credit history label, understand that opening new accounts does not improve your situation in the short term. Instead, maintaining your existing credit accounts will help you grow out of this classification. As long as you have a good mix of revolving and installment accounts, you can likely avoid adding new credit accounts for a while.
Join the Discussion at the Credit Forum: How does opening new credit accounts affect your scores?
Length of credit history is too short is credit bureau risk score reason 14. It may also appear as "length of time accounts have been established." NextGen scores assign code J0 for this factor. For more information on credit scoring, see the complete list of credit score factors.
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