When talking and writing about credit reports and scores day-in and day-out, it begins to seem pretty black and white.
- Pay your bills on time, every time.
- Keep your credit utilization low.
- Consistently use credit responsibly over time.
- Avoid opening new, unnecessary credit lines.
However, when I start talking to consumers, I realize there is a dense fog around what really helps or hurts your credit score. Here is just such a question…
According to [credit service company], my “total accounts” score is a grade F. Do I need to open more accounts to improve my credit report?
I have to give you a little background to this metric. This person is referring to a statistic that shows that most people with high credit scores have numerous credit accounts (a combination of open and closed accounts), which is true.
The dangerous conclusion this person is making is that opening more credit accounts will increase your credit score. Let’s try to make this statistical information a little clearer to understand and guide you in what, if anything, you should do with it.
Careful with Correlation Versus Causation
Any statistician will tell you that one of the most common errors in interpreting data is confusing correlation of data with causation. More simply put, if two things seem to often occur together, one must be causing the other.
In the case of the above question, the mistaken assumption is that opening more credit accounts will raise your credit score. Assuming you have a couple of credit cards and probably a car loan, opening a bunch of credit card accounts is probably going to hurt more than help.
Then What Is Going on Here?
But the statistic clearly shows that consumers with more credit accounts generally have better credit scores. In fact, the score distribution seems to indicate that the highest credit scores tend to have 21+ accounts.
[Free Resource: Check your free credit report and score]
What’s the deal then?It’s important to understand that your total credit accounts is a somewhat blended indicator of types of credit used, new credit and length of credit history. And these are three of the lesser weighted factors used in calculating your credit score. As a result, you should be careful about making this a significant focus of any credit improvement strategy.
What this statistic is actually revealing is:
People with good credit tend to use credit and over an extended period of time will have accumulated numerous credit accounts.
Here is a pretty typical scenario…
Credit Score: 720+
Age: 35-40
Credit Cards: 3 open / 5 closed
Auto Loans: 2 open / 6 closed
Mortgage: 1 open / 4 closed
Student Loans: 0 open / 2 closed
Obviously, the credit is being used responsibly with a 720+ credit score. And in this example, the use of credit seems reasonable with three credit cards, two car loans and a mortgage. However, this person has 23 total accounts.
Now, let’s take another scenario…
Credit Score: 720+
Age: 20-25
Credit Cards: 2 open / 0 closed
Auto Loan: 1 open / 0 closed
Mortgage: 0 open / 0 closed
Student Loans: 2 open / 0 closed
Again, in this example, credit is being used responsibly with a 720+ credit score. And the use of credit seems reasonable with two credit cards, an auto loan and a couple of student loans. But, in this case, the person only has five credit accounts.
Imagine if the person in the latter scenario misinterpreted that total accounts would improve his credit score. He might think he needs to open up 16 new credit cards! If he did this, would he still appear to be a responsible user of credit?
Of course not, and his credit score would certainly take a hit. Even if he didn’t get into debt with all that temptation, his average credit history would shrink to nearly zero months and there would 16 new hard inquiries on his credit report. Bad news.
Answer the Question!
Here’s the short answer to the original question: No, you don’t need to open additional credit accounts to improve your credit score. In fact, it might hurt your cause.
My personal recommendation is simply to open only the credit accounts you need – a couple of high quality credit cards, an auto loan and a mortgage. Beyond that, let your credit accounts age and show over time how good you are at paying your debt back perfectly.
What do you think? Any questions about credit scores or credit advice you have heard? Drop us a comment and I’ll do my best to answer any questions.
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