Barry Paperno is a freelance writer and credit scoring expert with decades of consumer credit industry experience, serving as consumer affairs manager for FICO (formerly Fair Isaac Corp.) 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 in The Huffington Post, MSN Money, CBS Money Watch and other consumer finance websites.
Dear Speaking of Credit,
I have a total of four credit card trade lines that show periods of delinquencies of the last four years, but over the past seven months I have paid those credit cards on time and kept my utilization very low. I recently added six credit card trade lines to my credit profile and here’s the question: Will the new credit trade lines help offset some of the negative (delinquencies) on the old credit cards as long as I continuing paying on time with OLD credit cards and pay on time with the new trade lines? If yes, how long would you estimate it would take to see the new cards begin to offset the old ones, which of course are still active accounts. — Clyde
Let me start by saying that managing to open six new accounts so soon following a four-year history of late payments is a pretty impressive feat. However, if rebuilding credit is your goal, it may not have been all that necessary to open so many cards to offset those past delinquencies. In fact, you may have actually tipped the scoring scales more in the other, less-positive, direction — at least temporarily.
I’ll explain what I mean via a category-by-category description of the various scoring impacts brought on by so many new cards being added within a short period of time:
Payment history (35 percent of your score)
In addition to the scoring benefits of paying on time for the past seven months, you’ve significantly increased your proportion of “good” to “bad” history with the addition of those six new cards. The diluting of the negatives in this way, along with the aging of past delinquencies, is likely to add more points to your score sooner than if you had simply continued to pay on time, kept balances low and refrained from opening new accounts. And as a rule, within this all-important category that carries more weight than any other, there’s no such thing as having too many good accounts; although, as you’ll see, the same can’t necessarily be said for all other areas of the scoring formula.
Amounts owed (30 percent of your score)
Another set of scoring calculations where you essentially can’t have too much of a good thing are those factors that measure how much of your available credit you’re using: credit card utilization (balance/limit ratio). You can be pretty confident that your combined credit utilization, where a lower overall percentage leads to a higher score, will continue to benefit from the addition of those six new credit limits well into the future, as you have added to the credit limit portion of the balance/limit equation while keeping balances low.
Length of credit history (15 percent of your score)
Here is a category where opening so many new accounts in a short period of time may have actually hurt more than helped your score. Your length of credit history consists of the average age of your accounts, the ages of your oldest and newest accounts, and some other ways of measuring your credit experience. For all length of credit history calculations, older is always better for your score, which means that with every new account opening you can be doing damage by reducing the average and newest account ages.
New accounts (10 percent of your score)
In addition to the recently opened accounts possibly hurting more than helping your score as part of the length of credit history calculations, the “hard” inquiries brought on by those new account openings can also keep your score from being higher. Fortunately, an inquiry is only considered by the scoring formula for one year and only amounts to about five missed points on average. And since most card companies only access your credit report at one of the three credit bureaus per new card, an inquiry is only likely to affect your score at one of the credit bureaus.
Types of credit (10 percent of your score)
Last and probably least important, a scoring factor within this category looks for an “ideal”– and secret — number of revolving (card) and installment (loan) trade lines on your credit report. You can miss out on some points by being either above or below this mysterious number, which varies according to the overall credit profile being scored. As such, there’s no way to know for sure if having added six cards to your credit report has hurt or helped your score, though the highly informative “FICO high achievers” study tells us that people with scores of 785 and higher tend to have fewer cards than you, with seven cards (including open and closed) on average and only four cards or loans that carry balances.
The bottom line
What’s the net result of all these good and bad forces you’ve put into play with those new cards? As we’ve seen, in the short run, having recently added six new cards could very well be bringing your score down when we consider the damage done within your length of credit, new accounts and types of credit categories. Yet, when we look at the two most important categories — payment history and amounts owed — that together make up almost two-thirds (65 percent) of your score, your longer term scoring prospects look much better.
So, while in your situation I would normally recommend opening only about two or three new accounts for rebuilding purposes, I have to admit you’ve done a nice job of adding a strong dose of positive credit to the mix. Now just continue paying on time while keeping those card balances low, and please, no more new cards!
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