Will you build credit more quickly if you get more credit cards? It turns out that credit scoring is not so simple.
While having more credit cards will give you more available credit and make it easier to keep a low utilization (improving your credit score), every new credit card you open will lower your average age of accounts (decreasing your credit score).
The same is true for secured credit cards, which require a security deposit to open.
Learn more in our video with credit expert John Ulzheimer.
Hi, my name is John Ulzheimer and I’m a credit expert who contributes to CreditCardInsider.com. If you have any questions for us please submit them in the comments section below.
Today’s question has to do with building credit using credit cards and secured cards, or secured cards. And the question is this: Am I going to build credit faster by having two credit cards or am I going to build credit faster by having two secured cards? Is that better than having just one or neither?
And the answer to the question is this: Building credit, the speed at which you build credit is not accelerated because you have five cards versus one card or two cards versus one card. It’s also not accelerated whether you have a credit card versus a secured card.
The rate at which you build credit is essentially in line with the age of the accounts on your credit report. So if you have one account that is 10 years old, that means you have a 10 year old credit report. If you have two accounts that are two years old, it means on average you have a two-year-old credit report.
And by consistently adding new credit cards or secured card to the report, you’re actually going to make that average age of your accounts lower and lower each time you do so because you’re adding something that’s brand new to the credit report that’s weighing down the average age versus actually helping the average age. So the speed at which you’re going to build credit really is not relevant to the number of the accounts on report, it’s the age of the accounts on the report.
There is one thing, however, to keep in mind: you will actually do better in your credit scores if you’re able to have a nice diverse set of accounts on the report: credit cards, installment loans, other types of revolving accounts. You’re actually going to do better if you have a mortgage, believe it or not.
Credit scoring models will reward you for being able to manage a mortgage loan because it’s such a large obligation. It’s very atypical relative to something a credit card or a retail store card or even a petroleum card, which are very easy to manage those because the balances are usually fairly low, but you’re actually going to build a credit score faster by actually having a nice diverse set of accounts.
So think about that. The age of the credit report, which is around 15 percent of the points you score, the diversity of the items on the report, which is about 10 percent of the points in your score, those two categories together are worth roughly 1/4 of the points in your score. We haven’t talked at all about whether you’re paying them on time, how much debt you’re in on those particular accounts… We’re just talking about how old they are and whether or not you have them.
So building a good credit score and a good credit report is not all about, or only about, paying bills on time and staying out of debt. It’s tackling strategically some of the secondary characteristics or metrics within the scoring model and one of those is how old is the report and the other is diversity.
So certainly I would not go out and apply for a car loan just to get one on your credit report. Apply for a car loan if you want to buy a car. I certainly would not go out and buy a home just to get a mortgage on your credit report. Buy a home because you really do want to buy a home. As these things start to hit your credit report over time organically just because that’s how it’s going to evolve, your scores are going to improve if for nothing other that now you’ve checked some more boxes on the report regarding the age of the information and also the diversity of the information, as well.
So if you have any other questions pertaining to credit or financial topics, then please submit them to CreditCardInsider.com or in the comments section below. Thanks for watching and have a nice day.
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