Why Credit Advice Won’t Work The Same For Everyone

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It seems like everyone is offering advice on how to improve your credit score, but not all of it will work equally for you. That is because the credit scoring process takes into account many factors, and the same advice will affect people differently, depending on their unique credit report. One team member raised their score by almost 100 points in 30 days, but that doesn't mean all consumers can accomplish the same results.

Here are some examples of why the same actions affect consumer’s credit scores differently:

Opening a new credit card

Many claim that opening a new credit card account will hurt your credit score, while others maintain that it can actually have the opposite effect. The fact is, opening new accounts has both positive and negative effects on your credit score, and whether or not the positives outweigh the negatives depends on your individual history.

Take a person we will call Fred. Fred has one credit card that he uses regularly and pays the balance in full every month. By acting so conservatively with credit, Fred hopes that he will have an excellent credit score. His score is good, but he is surprised that it is not much higher. If Fred opens up another credit card, he will expand his small credit history, increase the total amount of credit extended to him, and reduce his debt to credit ratio. You see, even though Fred pays his statement balance in full every month, his credit card issuer reports each balance to the credit bureaus as his current debt. This makes some sense, since it has no way of knowing that Fred will again pay his balance in full this month. Therefore, Fred actually has a considerable debt to credit ratio in the eyes of the credit bureaus. In Fred's case, opening up a new account will almost certainly improve his score significantly.

Now consider his neighbor, a man we'll call Ted. Ted loves credit cards, but like most Americans he tends to carry a balance. He is always the first to jump on a new offer for rewards and frequently tries to avoid interest charges by signing up for cards with promotional balance transfer rates. When Ted signs up for yet another new credit card, his credit score will most likely go down. If Ted has applied for several new credit cards in the last few months, another new account will hurt his score. Furthermore, his existing debt will likely make it hard for him to receive a large line of credit, so his debt to credit ratio will not drop by much. Finally, consumers like Ted who has trouble controlling their spending are the last people who should be using reward cards, which are designed to reward customers for spending more money.

Paying off debts

Molly has always struggled with debt. She has student loans, a car loan, and lots of credit card bills. As a consequence, she has never had great credit, even though she pays her bills on time. But now Molly has a new job and has decided to get her finances in order. Month after month she has been paying off her debts and within a few years she hopes to be debt free. Thankfully, she will see her credit score rise as her debts disappear. This makes sense, as lenders will be more comfortable loaning money to people who have fewer existing obligations.

On the other hand, her friend Polly doesn't have that much debt, just one stubborn credit card bill. Unfortunately, Polly's problem is that she has trouble paying her bills on time. Sometimes the bill is lost in the mail and sometimes she has trouble coming up with the money, but other times she just forgets to mail her checks on-time. Polly is also trying to improve her credit, and she decided to pay off her last remaining credit card debt.

To her surprise, doing so didn't help her credit score very much. That is because she never had that much debt to begin with, and her record of late and missed payments was hurting her score far more than her debt was.

Other reasons that credit scores vary after the same actions

One of the biggest considerations one should take when deciding if a certain action will hurt or help their score is by understanding how much that action accounts for their overall credit score. For example, opening up a new line of credit won't affect you nearly as much as paying off one of your balances because new credit only accounts for 10% of your overall score, while your balances (debt to credit) make up 30% of your overall credit score.

Making one move, like opening or closing a credit card account, may not be enough to swing someone's credit score very much, especially if they have a long credit history. On the other hand, those with a limited credit history can help, or hurt, their credit scores much more quickly by taking a single action. Additionally, there are three major consumer credit bureaus, and not every action will be reported to every bureau. For example, a customer could apply for a new credit card, which may only generate a new inquiry on one or two of the major consumer credit bureaus. When that customer checks his or her credit with another bureau, the score will be unchanged.

What will always improve your credit score

If you pay your bills on-time, and carry very little debt, it is hard not to have an excellent credit score. Worrying about opening a new account, or slightly lowering your debt to credit ratio is just tinkering around the edges compared to the two major factors that make up the majority of your credit score: debt levels and payment history. Likewise, you can try every trick in the book, but if you are heavily in debt and have trouble making your payments on-time, your credit will always suffer.  By paying your bills on-time and having very little debt, you will never have to worry about the minor effects of one thing or another.

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