Whether you're interested in purchasing a new car or a new home, you often need to repair your credit score first. Even if you can qualify for a mortgage or car loan, you'll get far better rates if you're able to improve your credit. Still, how you actually do that can seem mysterious. If your credit lines are hurting your credit score, shouldn't you shut them down?
It Isn't Credit That Hurts You, It's Utilization
The first thing you need to understand is that your credit lines, in themselves, don't hurt you. In fact, they help you. Your credit score looks at the average age of your accounts and the percentage of your credit line that you're utilizing.
Closing a credit account can hurt you in two ways:
- If it was an older account, it will lower the age of your active accounts. Creditors want to see a lengthy credit history so they can determine whether you're really a risk.
- When you close your credit account, the percentage of your credit that you're utilizing will go up. If you have $2,000 in debt and a total of $5,000 in credit (40%), closing a $1,000 credit line will make you have $2,000 in debt and $4,000 in credit (50%).
So why do people try to close their accounts? Often, you may be tempted to pay off the account entirely and shut it down, because it's currently hurting your utilization. The solution is just to pay it off, but there's actually another solution, too: you can open a single new account.
If you have $2,000 in debt and a total of $5,000 in credit (40%), opening another $2,000 credit line will leave you with $2,000 in debt and $7,000 in credit. That's a utilization of 28%.
How Can a Credit Line Hurt You?
There are some ways that a credit line can hurt you, but they are indirect. If you open many new lines of credit before getting a new home or car, a lender may see that as desperation. Opening many accounts quickly indicates that you're trying to spend too much money. A new credit line can also hurt your credit score because a credit line is associated with a "hard credit pull," which deducts points.
Otherwise, having a large number of credit lines is actually beneficial to you.
Before you start your credit score repair, you should consult with a professional. There are some things that you could do that could actually hurt your score, and set you back significantly on your path to a new home or car.
Reach out to a company like Optimal Credit to learn more.