Length of Credit History

What is Length of Credit History?

Length of credit history refers to how long you've had credit accounts open and active. It's a significant factor in your overall credit score, indicating to lenders how experienced you are at managing debt over time. Lenders typically prefer to see a longer history because it provides more data to assess your reliability as a borrower.

Why It Matters for Real Estate Investors

For real estate investors, a strong and lengthy credit history is crucial when seeking financing for investment properties. Lenders, including banks and private lenders, use this information to evaluate your creditworthiness. A longer, well-managed credit history can lead to better mortgage interest rates, more favorable loan terms, and higher chances of loan approval, ultimately impacting your investment's profitability.

Key Components of Credit History Length

• Age of Your Oldest Account: This is the time since your very first credit account was opened.
• Average Age of All Accounts: This considers the average age of all your open credit accounts.
• Recent Account Openings: Opening many new accounts in a short period can sometimes lower your average age and signal higher risk to lenders.

Building a Strong Credit History for Loans

Building a long and positive credit history takes time and consistent effort. It's a proactive process that can significantly benefit your real estate investing journey by making you a more attractive borrower.

1. Open Credit Accounts Early: Start with a credit card or small loan as soon as you can responsibly manage it.
2. Pay Bills On Time: Consistently making payments on or before the due date is the most important factor.
3. Keep Old Accounts Open: Resist the urge to close old, paid-off accounts, as they contribute to your average credit age.
4. Limit New Credit Applications: Only apply for new credit when necessary to avoid lowering your average account age.

Real-World Example

Imagine two investors, both applying for a $200,000 mortgage for a rental property. Investor A has a credit history of 15 years with an average account age of 10 years. Investor B has a credit history of 5 years with an average account age of 3 years. Both have good payment histories.

• Investor A, with the longer credit history, is likely to be offered a mortgage at a lower interest rate, perhaps 7.0% APR. This could mean a monthly payment of around $1,331.
• Investor B, despite good payments, might receive a slightly higher rate, such as 7.5% APR, due to the shorter history. This would result in a higher monthly payment of approximately $1,398.
• Over the life of a 30-year loan, Investor A could save tens of thousands of dollars in interest, directly impacting their investment's cash flow and overall return.