Once student loans are paid, a second card may be in order


Opening Credits
Columnist Erica Sandberg
Erica Sandberg is a prominent personal finance authority and author of "Expecting Money: The Essential Financial Plan for New and Growing Families." She writes "Opening Credits," a weekly reader Q&A column about issues for people who are new to credit, for

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Question Dear Opening Credits,
I recently closed two student loan accounts, which was great, but also made my average account age drop to a year and a half, which made my credit score drop.

I also only recently got a credit card. For a long time, I didn't (and still don't) believe in spending money I don't have. But for the sake of being a full-grown adult and taking advantage of the perks that plastic offers, I opened up a card in February. I then asked to up my limit after a few months to help with utilization. I don't keep a balance on my card and spend very wisely.

So my question is would it be better to ask to increase my limit again so soon to do better with utilization to help my score or open a second card to add another account? Or I suppose a third option is to do nothing and keep the status quo. Right now my credit score is in the mid to low 700s, and was on the rise up until I finished paying off my student loans and has dropped slightly. -- Ben


Dear Ben,
Rather than denigrate all that you've accomplished, celebrate! Well-managed student loans don't vanish into thin air after the final payment is posted. They usually remain on your credit report for 10 years and will be factored into your credit scores. For the FICO score (the most commonly used score, which ranges from 300 to 850), what you've done in the past 24 months carries the greatest weight. For this reason I assure you that these satisfied loans are not causing your scores to drop, but are instead working in your favor.

So what is causing your score to drop? Missing payments and carrying an overabundance of debt as compared to the amount you can borrow are the usual suspects, but that doesn't appear to apply to you. A short credit history is problematic, but as noted, that loan is still appearing -- and will for a long time. The final culprits are not enough different types of credit in use and inquiries for new credit. Combined they make up 20 percent of the scoring model, so it is possible that the combination of the loan's closure (which left you with just one active type of credit vehicle) plus the credit card limit increase (which may have resulted in a hard pull of your credit by the issuer) drove it down a little. Don't worry, though. The point reduction is temporary.

I love that you're approaching your credit so strategically. Obtaining a credit card was smart, and you're right that it can offer sweet perks. The most obvious of them, of course, is the ability to buy and have now, but pay later at no extra cost if you pay off the balance by the due date.

You can also use the card to hike your credit score even further. The process is super simple. Just charge often, send all payments on time and avoid carrying over a balance from one month to the next. That activity will be recorded on your reports and factored into your scores favorably.

Regarding your credit limit, though, you'll want it to be high enough to purchase what you want. If you need a bigger line because the one you have is too small for practicality, by all means ask your issuer for an increase. Your current credit rating plus a decent, steady income should be enough to assure a lender that you're a low-risk customer and can manage an extended credit line. However, since you just asked earlier this year, you do run the risk of being denied. Just don't take it personally. And every time you ask for a credit limit increase, the issuer may pull your credit to see where you stand, which will result in a temporary credit score ding.

Rather than ask for another credit limit increase, I suggest you apply for a second card. Yes, there will be an inquiry on your report, but the scoring impact is minuscule compared to your excellent payment habits and low debt-to-credit-limit ratio. The amount of time you've had and used credit products is important to your score and while you can't speed that up, you can prove that you can handle multiple accounts. Although types of credit instruments in use is a relatively minor scoring factor, adding another account and charging responsibly with it will eventually boost your score -- and soon offset any slight ding the initial inquiry would have.

Or you can sit back and enjoy your success. The scores you cite are on the cusp of the top ranking of 750 and above, which is a strong indication that you're doing all the right things. A new card and its boost to your overall credit utilization ratio will make those numbers edge higher, but I believe you'll get there naturally over time anyway.

Nice job, full-grown adult!

See related: FICO's 5 factors: The components of a FICO credit score, How to ask for a credit limit increase

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Published: October 7, 2015

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Updated: 10-27-2016

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