If you have a great credit score, the impact of opening a new account is small enough that it shouldn’t deter you from opening a new credit account if it makes sense for your personal finances. But if you have a low credit score, new credit applications and credit cards just dig you deeper in the hole. That is something you should avoid if possible.
Closing accounts can lower your credit score
In the last section, we discussed how older accounts help your credit score. Because that is the case, closing credit accounts can lower your credit score. Even if the account has negative information, it won’t drop right away when you close an account. It is still there for the full seven years. So do your best to keep your average age of credit as high as possible while trying to recover from a bad credit score.
For example, if you have two credit cards and one is four years old and one is two years old, your average age of credit is three years. If you close the older card, your average age of credit goes down to two years. Not good for your credit.
Don’t be fooled into closing a newer account, though. Once an account is open, the impact has already hit your credit score. Like the older account, your best bet is to just leave it alone and let it age and slowly help your credit score increase.
Paying off debt is the only quick fix
There is one big exception to the rule where you do have the power to quickly increase your credit score. Aside from finding and fixing errors, the best way to fix your credit score, if you have outstanding credit card or other revolving debt, like a line of credit, paying off your debt should improve your score over the next month or so.
Contrary to a common myth, you don’t need to use your credit card every month to increase your credit score. You don’t need to carry a balance to help your credit. The opposite is true. The best credit card balance for a high credit score is $0.
Paying off debt is often easier said than done, but it will help you increase your credit score. The impact won’t be instant. Most banks report credit balances and payments monthly, so you’ll have to wait until the next reporting cycle for your newly paid off debt to show up as paid. When that happens, however, your score should go up instantly
Don’t touch, even if you are tempted
Outside of fixing errors and paying off revolving credit balances, there is no quick answer to a bad credit score. That doesn’t mean you should not try to improve your score. As you probably know, a high credit score opens up the door to the best interest rates, loan options, and rewards credit cards. If that sounds like something you want in the future, keeps your hands off and let your credit fix itself. Make 100% on time payments going forward and pay off any outstanding debt and the only thing standing between you and the 800+ credit score club is time. It may be frustrating, but it is well worth the wait.