New credit determines about 10% of your FICO score, making it a fairly important factor in your overall creditworthiness. According to FICO, people in the United States have more credit today and still shop for new credit more frequently than ever. This kind of behavior leads to the very pertinent question, that is, how new credit impacts your credit score. Well, there is no specific answer to this question. In fact, there are many different ways that new credit affects your credit score.
Number of New Accounts
As you open more new accounts, the average age of your accounts begins to fall. This has a pretty sizable impact on your credit score, especially if you have been managing credit for a short time. With lack of other credit information and a small average account age, your credit report may not look too attractive to lenders. On the other hand, even if you have used credit for a long time, opening a new account can still lower your credit score. Does this mean you shouldn’t apply for new credit? Definitely not. The key is the frequency with which you open new accounts. Experts urge not to open new accounts too rapidly. This is because shopping for credit will be reported on your credit report and may seem “risky”. As a result, it is better to space out the opening of new accounts over a longer period of time so that it does not work against you.
Applying For New Credit
You will often find that every time you apply for new credit, the inquiry will show up on your credit report and will possibly lower your credit score. Even though the impact of each individual inquiry is small, having multiple inquiries may accumulate a larger effect on your score. These inquiries may remain on your report for about 2 years, while the score takes into account all the inquiries made in the past 12 months. Many people argue that they are forced to make several applications for loans, especially when they are shopping for large long-term debt, like mortgage or auto loans. Fortunately, having multiple auto loan or mortgage inquiries in a short period of time does not affect your score since these are typically treated as a single inquiry. This is called “rate shopping” as the borrower is looking for the best rate available in the market. Credit scores allow for rate shopping. Other than this type of loan inquiry, it is best to be very careful when applying for new credit because it can lower your credit score significantly. In conclusion, the impact of new credit on your score will be affected by your overall credit profile and what else is already on your credit report. People with a few accounts or a short credit history will notice that new credit has a larger effect on their scores in comparison with their counterparts.
Frequently Asked Questions
1. Why did your credit score drop after getting a new credit report?
When you apply for a new credit card, card issuers pull your credit. It is because they want to see how much risk you pose before lending you a line of credit. This is known as Hard Inquiry, which lowers your credit score temporarily.
2. What is a new credit?
If you decide to apply, you have crossed into new credit territory with regard to your credit reports and score. The new credit category is triggered any time you apply for credit that you did not have before. This includes credit cards, of course, but also things like auto loans and mortgages.