Number of Established Accounts Impacts Credit Scoring |
By Kenneth Long on August 5, 2010
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FICO credit scoring models reserve 15% of their formulas for factors that indicate duration of credit history. While having an account open for many years definitely helps increase your average account age, most lenders want to see that you have established a number of accounts with a lengthy credit history in order to classify you as a lower credit risk. Of course, those accounts must be in good standing to actually help you.
This scoring code may also be a factor in the 10% of credit scoring formulas that reward a good mix of credit accounts. Essentially, that portion of the puzzle rewards consumers who have both revolving credit accounts and installment loan accounts in their credit histories.
If you have several credit accounts listed on your credit report, it is unlikely that you would ever encounter this risk code. However, if you have a relatively empty credit report, or if it only shows collection items from non-credit accounts, then you may be impacted by this factor as well as several other negative factors.
If you have a low number of established credit accounts, then you need to take baby steps. No lender will approve a big loan for someone with no credit. Instead, you need to focus on the types of accounts that are normally approved for someone with a short credit history.
First of all, make sure that you carefully research which credit account you think you can qualify for. Applying for multiple accounts in a short period of time can place too many recent inquiries on your credit report.
A store card may be a possible option if you have limited credit. A secured credit card is also a feasible first step. While the interest rate can be high and the credit limit low, it can be a starting point. In order for the account to help you, it will need to show periodic use and a zero or very low balance. Using the account once every 3 or 4 months is sufficient enough to show frequent use.
You may also consider obtaining an installment loan with your bank or credit union (not a finance company). To increase your chances of approval, you can pledge $1,000 towards a certificate of deposit (CD) as collateral for a $1,000 loan. You should make on-time payments on the account to avoid any negative repercussions. While paying the loan off too early will not help you, it is probably OK to pay it off when at least half of the normal term has commenced so that you reduce your overall finance charges.
In some circumstances, a cosigner may help you with approval for a credit account. However, if someone does cosign for your account, you have an incredible responsibility to ensure that the account is kept in good standing. A single late payment can injure their credit rating as well as yours.
Remember that the account needs to be properly aged to provide meaningful benefit. Revolving accounts should be kept open in good standing at least 2 years to provide this benefit.
Join the Discussion at the Credit Forum: What is the ideal number of established accounts?
Number of established accounts is credit bureau risk score reason 28. It is NextGen score code N2. For more information on credit scoring, see the complete list of credit sccore factors.
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