Don’t close those accounts, but take these 3 steps to rebuild your credit score
Barry Paperno is a freelance writer and credit scoring expert with decades of consumer credit industry experience, serving as consumer affairs manager for FICO and consumer operations manager for Experian. He writes “Speaking of Credit,” a weekly reader Q&A column about credit scoring and rebuilding credit, for CreditCards.com. His writings about credit scoring have appeared on Huffington Post, MSN Money, CBS Money Watch and other consumer finance websites.
Ask Barry a question, or see if your question has already been answered in the Speaking of Credit answer archive.
Dear Speaking of Credit:
I ran into an issue this past year by opening up too many lines of credit. Previously, I had a pretty decent score for being only 25 years old.
I have a few cards that are not carrying any balance, and I’ve had them for more than six years now. The problem is, this past year I opened too many lines of credit and I think it hurt my score.
I went from an average credit age of around four years to now around two, and there probably were too many hard inquiries.
My score dropped around 35 points, and I’m not sure what I can do to raise it. I am only using around 20 percent of total credit, too.
Would it help to pay off and cancel some of these newer accounts? Or should I just ride the bullet and hope for the best. – Jordan
Good for you at having amassed such an impressive credit history at such a young age! Unfortunately, you now seem to be seeing why credit experts always recommend opening new accounts only when necessary.
Despite not knowing your credit score, just knowing you have been able to obtain multiple new accounts with so little prior history tells us your score must have been a good one – over 700 – before the drop.
And even after having dropped 35 points, your credit score might still qualify you for even more new credit.
Two strong components of any high credit score
For that good score that brought you all this new credit, you can thank a credit report in which:
- All of your accounts are reported as paid on time: Payment history accounts for 35 percent of your score.
- Your cards reflect the respectable credit utilization rate of 20 percent: The amount you owe compared to your credit limits represents 30 percent of your score.
These categories, which represent 65 percent of your credit score, are the two most important for credit scoring purposes, and you seem to be doing well on both. That means the score drop you’ve experienced following so many recent account openings can probably be traced to changes within a couple of the remaining, and less influential, credit score factors:
Length of credit history: Older is always better
As you’ve pointed out, a good portion of those 35 points could have been lost due to your average credit age falling from an already-low four years to a mere two years.
That and the calculation measuring the length of time since your last account opening, another factor in which old is always good, are likely to have played a major part in your score drop.
New accounts: Fewer is always better
Short credit histories, and especially those containing very recently opened accounts, can lead other, often unrelated, credit score factors to take on more importance than they would with an older history.
For example, the hard inquiries left from those account openings during the past year are likely to be taking a larger toll on your score – perhaps by even more than the typical five points or less – than they would, had your credit history been more established.
Tip: Keeping a low credit utilization – the amount you have borrowed compared to your credit limits – is key to keeping a high credit score. If you already have an otherwise low credit utilization – for example, between 20 and 30 percent – and you want to improve your score further, consider bringing your utilization down to a range between 1 and 10 percent.
3 steps to take to improve your credit score after a slip
Fortunately, since you’ve been conscientious in adhering to the most important aspects of credit scoring – how you pay and how much you owe – reversing that downward trend becomes simply a matter of a few easy do’s and don’ts:
- Do pay down that 20 percent utilization.
Though your current utilization of 20 percent is certainly good enough to produce a good credit score, you usually can add at least a few extra points to your score by further reducing both your combined and individual card utilization percentages to a range within 1 and 10 percent.
- Don’t open any more new accounts.
As you’ve seen, each new account opening can reduce both your average credit age and the age of your newest account, while adding hard inquiries along the way. The passage of time with no new account openings can easily restore all of those age-related points and more over the next couple of years.
- Don’t close any new or old accounts.
Closing an account neither removes it from your credit report nor excludes it from any credit age calculations. And what’s often worse, closing a card excludes its balance and credit limit from those utilization calculations – lenders like to see as much available credit as possible.
After focusing as we have on the downsides of new account openings and short credit histories, it’s only fair to also commend you for consistently paying on time and keeping your utilization relatively low.
Your job now is to continue managing your credit as you have been, but without adding anything new to the mix.
And considering that those higher scores are awaiting you well before reaching the ripe old age of 30, what could be easier?
See related: How many cards is too many?, 10 things NOT to do when you apply for a credit card
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