Having aged or seasoned credit is such a crucial part of building healthy credit scores and profiles. Like in most things, ages shows experience, knowledge, and maturity – especially if those aged accounts have been cared for and remained in good standing.
Seasoned credit is defined as, accounts that are reported to credit bureaus that are over 1 to 2 years old.
As accounts season and credit history is built, they become an asset to credit profiles, and the more positively it can affect the overall credit score of the consumer. Part of what factors into the credit score is the amount of seasoned credit and the average age of that credit. If a consumer has 8 accounts that are all ten years of age the score will be much higher (as long as there are low balances and no delinquencies) than a consumer with the same amount of credit and balances but differing by an average age of three years on all these accounts. Old credit is a treasure to the credit score since it shows a lender or creditor that a consumer has experience and ability as a long standing credit manager. Clearly if a consumer has been managing credit well for 10 years it would make them a lesser risk than one that was only in the credit game for 3 years.
When consumers close credit, it can be removed two years later. Although a closed account may stay on the report for 2 years or more (after which it can drop off), once it is deleted from the profile it might affect the average age of the whole profile. This is why it is best to keep credit open and active insuring it will stay on the profile indefinitely.
Here is a real example of how the age of credit can affect scores:
Suzy and her future husband were in the market for a new home in Manhattan, and found a place that fit all of their requirements and then some. Suzy and her fiancé were young attorneys in their late twenties making a substantial income, and they both had excellent credit scores above a 740. With this in mind they have qualified for the best rate and lowest down payment. With current interest rates, they could easily have a 3.5% interest rate on a $900,000 loan equaling a monthly payment of about $4,000 and totaling over $1,450,000 over a thirty-year period. While Suzy was in law school, she had a joint credit card with her mother that had been opened ten years before. Suzy closed the account in 2008 and wanted all of her credit in her own name as an expression of her success and independence. This account, however, was the oldest account on her credit profile and it gave her score an extra fifty-point boost. Unfortunately for Suzy, the account happened to fall off her report a month before she and her fiancé had their credit reviewed by the bank pre-approving them for a mortgage. Her score dropped to a 700 and she no longer qualified for the same loan. Given her new lowered score, there were two possible scenarios, depending on where she received the loan:
- The bank could completely reject her for this type of loan since she fell under the 740 threshold.
- If a private lender or bank decided to issue the loan, it might charge much higher rates or penalties.
In this case, Suzy was able to get approval for the loan but her interest rate went up to 4.2% which increased her monthly mortgage payment by approximately $400, and the total payments over the thirty-year period by about $135,000. The differences in monthly and lifetime loan payments are astounding. That is a lot of extra money to pay for simply closing a seasoned account!
Perhaps the most persuasive argument for taking the time to consider your seasoned credit comes from the lost opportunities: college savings for their future children, investment in their retirement, financing a future business venture, a summer home, or even a trip around the globe–the list is endless! The costs of closing a seasoned credit account come in opportunity as well as dollars.
When it comes to credit, there is a lot to consider before pursuing a course of action. Before jumping to make a decision, discuss closing accounts with a credit specialist so they can give you an estimate of whether it will cause any damage to your scores.