Rebuilding Credit: Is Opening New Accounts the Best Way?

A common piece of advice for those looking to improve their credit is to open new accounts. While this can be a valid strategy for someone building credit from scratch, it's often misguided advice for those rebuilding a damaged credit profile.

Building vs. Rebuilding: A Key Distinction

• Building Credit: This applies to individuals new to credit (e.g., young adults, new immigrants). For them, opening new accounts like credit cards and managing them responsibly is essential to establish a credit history.
• Rebuilding Credit: This term, by definition, implies a "dirty" credit file – one with negative items like late payments, collections, or charge-offs. The goal is to return to a previously stronger credit standing.

The problem arises when advice for "building" is incorrectly applied to "rebuilding."

The Primary Focus of Rebuilding: Clean Up Your Report

If your credit file is dirty, the most effective approach to rebuilding is to address the existing negative items. Strategies like:

• Pay For Delete (PFD): Negotiating with collection agencies to remove a collection account from your report in exchange for payment.
• Goodwill Letters: Requesting creditors to remove legitimate late payments as a gesture of goodwill, especially if you have an otherwise good history with them.

The number one priority should be the elimination of negative items to move from a "dirty" scorecard to a "clean" scorecard. Everything else is secondary.

The Flaw in the "Open New Accounts to Rebuild" Logic

Often, when someone with a damaged credit score asks for rebuilding advice, responses flood in suggesting opening new accounts – "Consider Self, Chime, or [insert gimmick credit-builder product here]," or taking out new loans. This advice misses the core issue: the existing negative information.

Think of it like this: Imagine a car that once ran perfectly but now has a blown transmission. The "fix" is to repair or replace the transmission (analogous to removing negative items). Simply putting new tires on the car or getting it detailed (analogous to opening new accounts) might be "improvements," but they don't solve the fundamental problem that the car doesn't run.

The Role of New Accounts in Rebuilding

This isn't to say that opening new accounts has no value for someone rebuilding. However, it should be a supplementary strategy, not the primary one. The main focus must remain on cleaning the existing report.

Adding new, responsibly managed accounts after or while addressing negative items can help, but it won't "dilute" or outweigh significant negative marks on its own. Credit Karma sometimes promotes the idea that new accounts can "dilute" missed payments by increasing the percentage of on-time payments, but this is misleading. FICO scores don't work that way; a missed payment remains a significant negative factor regardless of how many new on-time payments you make on other accounts. (See also: Credit Myth #7 - Number or percentage of on-time payments impacts your score).

Conclusion

If you are truly rebuilding credit (i.e., you have negative items on your report), your first and foremost strategy should be to address and try to remove those negative items. Opening new accounts without tackling the existing damage is like treating a symptom without curing the disease. While new, positive credit lines can be part of a long-term rebuilding plan, they are not a shortcut or a primary solution for a dirty credit file.