One of the biggest mistakes that account holders always commit is opening too many new accounts at the same time. They then find out that their scores have taken a hit because it has shortened the average age of the credit, shortens credit history, and adds too many hard inquiries.
But what should you do if this has indeed happened? Should you close the account immediately? Or should you wait for some time to pass before closing the accounts?
Components of Credit Scores
Remember that in order to get a good credit score, you must have a good credit report that records all your accounts and states that they are indeed paid on time as payment history accounts for 35 percent of your score.
Additionally, all of your available credit should not be used and maxed out. You should only have a credit utilization of 20 percent or less as this represents 30 percent of your score. Both these categories alone represent 65 percent of your entire credit score.
Lastly, the length of the credit history, credit mix, and new credit account for the remaining 35 percent.
Credit History Matters
As stated, the length of credit history accounts for 35 percent of the entire credit score. This means that having an older, longer credit history is always better to have a high credit score. However, the credit history isn’t calculated for each card but the average age of all cards.
If you open too many new accounts or lines of credit in just a short span of time, the average age of your credit will significantly go down, which will likely hurt your credit score. This is especially true for those with short credit histories.
On top of shortening the average age of your credit, having too many hard inquiries on your credit report when opening new accounts will also hurt your credit score since it is a possible indicator of financial distress.
Steps to Take
Closing the newly-opened accounts will only further hurt your credit scores. Luckily, that’s not the only option you can take. In fact, there are three steps that you can take to improve your credit card after your downward trend.
- Keep your credit utilization low
It’s always good to keep your credit utilization at a maximum of 20 percent. But you can also further add a few extra points to your score by reducing both your combined and individual card utilization percentages to about 1 to 10 percent.
- Don’t close old or new accounts.
While it does seem like a good idea to close accounts that put you in that spot in the first place to prevent further damage, it really isn’t. Closing an account excludes its balance and credit limit from those utilization calculations – lenders like to see as much available credit as possible, yet it’s not removed from your credit report. It’s still there.
- Don’t open any more new accounts
If you already got into this mess because of opening new accounts, it’ll probably be a good idea to spot opening new accounts. Again, your average credit age will be reduced. But don’t worry, the passage of time with no new account openings will restore all your age-related point deductions.