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Credit Scores 101: Accounts and Other Factors

Mathew Kerbis

Credit Scores 101: Accounts and Other Factors

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Everything mentioned in this article is only financial information and not financial advice. Please consult a financial advisor before making financial decisions.

How Do Accounts Affect Your Credit Score?

They are only one of several factors listed on your credit report that help determine your credit score. Factors typically used to determine your credit score include:

  • on-time payments
  • oldest credit line
  • credit usage ratio/revolving utilization
  • recent inquiries
  • new accounts
  • available credit
  • total accounts

These factors interact in many ways, which I explain below. Credit bureaus and financial institutions may weigh the factors using slight variations, but experts generally agree that the most important factor is never missing a payment. If you have missed a payment, the next most important factor is never to miss another payment.

Types of Accounts on Your Credit Report

The type of account listed on your credit report can make a difference in your credit score. Examples of accounts include credit cards, mortgages, home equity credit lines, student loans, car loans, and other loans. Generally, having different types of accounts that you can keep current signals that you can balance multiple accounts and results in a higher credit score to show lenders or landlords that you are creditworthy. Even closed accounts may stay on your record for several years, like when you (hopefully) finish paying off your student loans. For a time, you will still benefit from having those closed accounts on your credit report.

When it comes to how the quantity of accounts on your credit report impacts your credit score, it is layered and nuanced. Generally, more accounts added over time is a good thing if you stay current on all of your accounts. Adding too many accounts too frequently may negatively impact your credit score in the short term because that may count against the new accounts and recent inquiries factors. Keeping these as low as possible within a two-year period will positively impact your credit score.

Strategies to Increase Your Credit Score

Sometimes that small negative impact on your credit score is outweighed by adding another credit card account, increasing your total credit limit, and decreasing your credit utilization if you maintain spending habits. A low credit utilization generally improves your credit score, although having credit and not utilizing it at all may hurt your credit score. Because one of the easier ways to increase your credit score is to increase your credit limit, getting more credit cards over time could be one strategy to increase your score. This strategy has other potential benefits—opening new credit cards often comes with incentives such as extra cash back or bonus miles if you meet certain conditions. However, these offers can become traps for the unwary, and you shouldn’t take on more accounts than you can manage. Alternatively, some credit cards let you increase your credit limits every six months without a hard credit check, which means you can avoid the recent inquiry that typically happens when opening a new account.

Before adding new accounts, consider certain milestones you are trying to achieve and the corresponding timeline. For example, if you are getting ready to buy a home, avoid adding any new accounts until you’ve closed on your purchase. Adding more accounts too close in time before buying your home may reduce your credit score, impacting your mortgage interest rate. Because you may be paying that interest rate for the next 30 years, barring any refinancing, you want that rate to be as low as possible. The same strategy applies when purchasing a car because those also tend to be longer note terms.

Final Thoughts

You can request a free copy of your credit report once a year from any credit bureau, and most banking apps allow you to check and monitor your credit scores at any time. Take advantage of these free resources to keep track of your progress on taking your credit score to the next level!