Are you looking to increase your credit score? If so, you may be tempted to open a new account in an attempt to do so if you are following the common credit myth that the more credit you have, the higher your score will be. But before you apply for that new credit card, take a look at when obtaining more credit can help your score and when it can hurt it.
This post has been sponsored by Lexington Law. All opinions are mine alone and are honestly conveyed.
The more credit you have, the better your score will be, right? Well, not exactly. You may have heard this before, but it isn’t necessarily true. More credit simply means that you have more creditors reporting to the bureaus on you. What makes your score better (or worse) is what those creditors are reporting about you.
Factors of your credit score
Remember, there are three credit bureaus—Experian, Equifax, and TransUnion—and they all utilize the Fair Isaac Corporation (FICO) method of evaluating consumer credit worthiness. The FICO scores from each of these bureaus are calculated based on the information being reported to it by your creditors. Here’s a quick recap of the factors used to determine your credit score:
- Payment history, 35%
- Amounts owed (balance to credit limit ratio), 30%
- Length of credit history, 15%
- New credit inquiries, 10%
- Mix of credit accounts, 10%
Keep in mind that the bureaus use all information that is reported to them to calculate your score, so you should regularly check your credit report to make sure that there isn’t any incorrect or old information showing up, which could negatively affect your credit score.
Opening too many new accounts can actually hurt your score
There are times when too much credit can hurt your score. Here are some of the factors that can drag your score down, especially when opening new accounts:
Length of payment history
If you open several new accounts, that is the problem itself—they will all show up as new accounts—and they won’t have any historical data. So, in the short-term, this can harm your score due to uncertainty of whether you will actually pay back this particular debt. Once you have an established period of time that shows consistent and on time payments, these accounts will start to help boost your credit score.
Credit card balance is too high
If you have several credit cards, this is not necessarily going to hurt or help your score, in and of itself. However, having several credit cards with maxed out limits is going to hurt your score. Even if you are making on time payments, maxing out a credit line is going to negatively impact your score. Try to keep the balance to credit limit ratio at 50 percent or less.
Amount of credit inquiries
If you open too many new accounts within a short period of time, it can drag your score down. While a few credit inquiries won’t affect your score negatively, having several creditors pull your credit will cause your score to decrease. If you are shopping around for a loan or a new credit card, try to do some research up front and find out about the terms and programs before you give approval for a potential lender to pull your credit. Decide which programs sounds like the best deal, and move forward with only that lender.
When can opening a new account help your score?
Yes, too much credit can hurt your score, but there are also times when deciding to open another account can actually work to your advantage:
Keep the balance on a new card low
If you open a credit card and keep the balance low in relation to the credit limit that has been extended to you, then, over time, this can help your score. It will show that you have quite a bit of credit open to you, but that you are not utilizing it, indicating financial discipline. Just as mentioned earlier—having a balance to credit limit ratio over 50 percent can harm your score, however, keeping that ratio under 50 percent can help your score.
Make the payments on time
Of course, this takes time to show that you have made payments on time each month and kept yourself in good standing with the creditor. While this builds credit history, it is a slow process, so don’t expect a quick fix. But, overall, the more creditors that are positively reporting on you over time, are going to boost your score because it shows that you have been a trustworthy consumer in the past, so most likely, you will be in the future too.
Catch up on accounts with late payments
If you open a new account to pay off bad debts or accounts with late pays, this can give you a fresh start—well, sort of. Any time you can get collection accounts or accounts with late payments caught up, you will increase your credit score, but it will take time. Of course, you need to resolve whatever caused you to get behind initially so that moving forward you can keep your payments up-to-date.
Don’t be too quick to close old accounts
Even though you may not use certain credit cards very much, you may want to think twice about closing them. Why? Old accounts can do a couple of things for you. First, they show history. If you have been in good standing with a particular lender for several years, then keeping this account open is probably going to have a positive impact on your score. Secondly, this type of account shows a low balance to credit line ration. When you have access to a credit line that you aren’t using, it shows that you are controlled financially and don’t max out all of your credit cards. So it is pretty easy to see how closing an older account with no balance and a lot of open credit can hurt you, when it comes to calculating the amounts owed portion of your score.
Having a lot of credit won’t increase your score; it’s how you utilize the credit that you have that counts.