HAVING MANY CREDIT CARDS AND ACCOUNTS CAN DECREASE SCORES FOR SOME WHILE IMPROVING SCORES FOR OTHERS. HOW CAN THIS BE?
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When it comes to credit scoring, many score reactions are a paradox. What might increase scores for one individual can actually reduce scores for many others.
Having a variety of credit with a nice mix of credit cards, store cards, mortgage accounts, student loans, and car loans/leases over long periods of time can build a strong credit portfolio and high scores. When a consumer has a well-rounded credit portfolio with aged accounts that have stayed current it reflects great credit management skills which adds points to the credit scores. Juggling and building a lot of credit over long periods of time, without delinquencies, shows lenders that the credit holder is a responsible and seasoned borrower with a low default risk.
On the other hand, if a borrower has been in the credit game for 6 years and opened 4 new accounts in the past 3-6 months this borrower would be seen as a much higher risk and the scores would be lowered. When a young credit holder (age of credit determined by the date their first account was opened) has doubled the amount of credit accounts within a short period of time it can be viewed as too many accounts and become cause for concern. Since this individual has limited experience managing credit and has doubled his accounts the score must reflect their new greater risk of default. Naturally scores will be lower.
For example:
Let's take consumer A&B and have a closer look at exactly what their credit reflects:
Consumer A is 53 years old and has been developing credit for 35 years. Her FICO Score is an 820 which is amazing and she has never had a delinquency.
These are the accounts on her credit report:
- 14 open and active credit cards including store cards, master, visa, and amex.
- Credit card limits equal to $120,000.
- 3 closed credit cards that were opened over 28 years ago .
- A balance-to-limit ratio on revolving credit of 5%
- A current mortgage that was opened 8 years ago.
- A closed mortgage that is still showing on her credit report that was opened 26 years ago.
- 3 car loans/leases that are paid and closed.
- 1 current car loan that was opened 3 years ago.
- No third party credit reviews in the past two years.
Consumer B - a 29 year old who has been developing credit for 6 years. His credit FICO score is a 620 and he has no delinquencies.
The accounts on his credit report are:
- 7 open and active credit cards including store cards, master, and visa cards.
- 3 of the cards were opened 5-6 years ago and 4 were opened in the last 3-6 months.
- Credit card limits equal to $10,000.
- A balance-to -limit ratio on revolving credit of 20%.
- 1 auto loan opened 4 years ago .
If Consumer B had kept his credit accounts down to only 4 (excluding the 4 new credit cards) his score would have been anywhere from a 680-710. When applying for a mortgage the difference between a 620 and 680-720 could mean enormous savings on fees, insurance premiums and interest rates, or the difference between being rejected or approved depending on the loan. For this individual going from 4 to 8 accounts in 6 months signified too many accounts for his credit level and dropped scores dramatically. But for Borrower A, the credit experienced individual with many years of developing varied types of credit, the 16 open and active accounts are not reflective of too many accounts on credit and delivered amazing credit scores showing a low risk of default. Using a strategy for developing healthy credit scores and variety of credit with a timeline of your goals can make a world of a difference for your success.
Feel free to reach out to us if you have any credit reports you would like reviewed or any credit questions! You can contact us at 877-292-0656 or email us at info@precisioncreditrestoration.com.
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