Min-Maxing | Credit History
I’m personally applying these concepts, but some of this is pure theory-crafting. I’m also assuming we know how to use credit responsibly.
Previously, we discussed a straightforward way to improve your credit history was to simply have a primary cardholder add us as an authorized user, but there are a few more optimizations we can make.
If we’re truly min-maxing our credit age, then outside of the authorized user path, it stands to reason we should open an account as soon as possible.
The earliest someone can actually open an account is when they’re 18.
I’m not advocating for someone to actually use this account before they’re ready to handle credit, but rather simply have it open and age it to grow their credit history.
In addition, remember that average age is a key factor in our scores.
If we have a small number of accounts, say 1 or 2, anytime we open a new account, it could dramatically drop our average age.
I’m assuming we do want to keep opening new accounts throughout our lives in order to cash in on lucrative rewards cards and great terms for auto loans and mortgages.
This means is in addition to opening our first credit account as early as possible, we also want to open multiple credit accounts as early as possible so they can all age.
Be careful and do your own research on this as you can and occasionally will get denied for new accounts due to a variety of reasons which can hurt your score (usually temporarily): Chase 5/24, too many credit cards opened, or too much credit relative to income.
One great way of doing this is to wait for a great pre-approved offer to come in, which tends to mostly guarantee the issuer to approve us for the card.
Ideally, these initial cards are all strong starter credit cards (1.5 - 2% cashback on everything) with no annual fee, which we’re happy holding for decades if not the rest of our life.
Done correctly, we’ll end up with a few aged credit accounts, minimizing the drop in our average age whenever we open a new account.
Here are some examples, say we have:
- 1 card that’s 10-years old and we open a new card, that drops our average credit age from 10 to 5 years old
- 2 cards that are both 10-years old (opened in the same year) and we open a new card, that drops our average credit age from 10 to 6.7 years old
- 4 cards that are all 10-years old (the most you can reasonably expect to open in a year) and we open a new card, that drops our average credit age from 10 to 8 years old.
In the latter case, the drop has hardly moved our average credit age at all.
The concept here is to have enough accounts where opening and closing an account stops affecting our credit scores, at least from a credit age standpoint.
Personally, I have over 20 accounts and the last few accounts that were closed by banks due to inactivity (oops!) have not changed my score at all. Though since it’s a sample size of 1, me, take it with a grain of salt.
Once we have active accounts, a key long-term risk is that the oldest accounts get closed, which issuers are known to do when the card doesn’t get used.
One way to mitigate this risk is to simply use it, but rather than increase our overhead by having to set reminders or remembering to use our oldest card, we can simply have it set to pay a recurring subscription.
I’m looking at you Netflix, Hulu, Disney+, or more commonly just utilities (phone plan, internet, electricity).
If you are looking to close accounts, consider not closing your oldest account as that will hurt your credit score.
Despite all the hate student loans get, it does have a potentially interesting side effect as it tends to be multiple loans over the course of the degree.
These also tend to occur relatively early in a person’s life and as a result, check many of the boxes we mentioned above: opens accounts earlier rather than sooner and creates multiple accounts that age.
This is not a good reason to take a student loan, just something to note.
Student loans tend to have notoriously long payback periods with the average repayment period taking around 20 years.
This means they continue aging with the majority of borrowers for quite some time.
The combination of the above means that student loans can actually improve credit scores as long as we’re able to pay them off consistently, providing a boost to graduates.
A silver lining for crippling debt that could take decades to pay off. 🙃
The irony is that when mortgages and student loans are finally paid off and fall off our report, that could negatively impact our scores.
At the end of the day, the key is still to use credit responsibly.
There’s no point in min-maxing just this one factor if we can’t demonstrate our ability to handle the most fundamental piece: repeated on-time payments.
Let me know if you disagree or research has shown otherwise to anything above!
This post was ported over from my Substack series