Getting a good credit score is tough — keeping a good credit score is just as tricky. There are several components that affect your score, from how well you are able to make your payments on time to how long you’ve had credit in your name. New credit is another important factor that influences your credit score. While it typically won’t cause tremendous peaks and valleys in your credit history, little changes will make a difference.
What Is New Credit?
New credit is one aspect of your credit report that determines whether your credit score will go up or down. According to FICO, an analytics company with the most commonly used credit scoring model, new credit consists of:
- New accounts
- Recent credit inquiries
- The age of your most recently opened credit account
Scoring models look at what new accounts have been added to your report and what type of account they are. Further, they take note of how many of your total accounts are new accounts. In general, you can assume that credit is considered “new” if it has been added to your account within the past 6–12 months.
Recent credit inquiries
When you apply for a new credit card or loan, issuers and lenders conduct a hard inquiry, also known as a “hard pull”, on your credit report to assess your history with credit. This helps them decide whether or not they want to approve you for the loan or card.
Hard inquiries fall under the “new credit” category of your credit score, as you’re applying for a new credit account. While inquiries stay on your report for up to two years, they won’t always affect your credit score for that long.
Inquiries have a relatively small impact on your credit score. Not all inquiries are taken into account when calculating your score; for instance, soft inquiries will not have an effect. You also don’t have to worry about multiple applications dinging your credit score when rate shopping for credit cards or loans. Credit bureaus and scoring agencies protect your file during this time so inquiries will only affect your score if you are approved and sign a credit card or loan contract.
The age of your most recently opened credit account
Finally, scoring agencies look at how long it has been since you opened a new account. The newer the account, the more it can negatively impact your credit score. Once you’ve had the account for a longer amount of time and you prove that you can use credit responsibly and make on-time payments, you will start to see your score increase.
How Does New Credit Hurt Your Credit Score?
New credit accounts for 10% of your credit score. In the grand scheme of things, it’s not much. Payment history and credit utilization account for far more.
- Payment history: 35%
- Credit utilization: 30%
- Length of credit history: 15%
- Credit mix: 10%
- New credit: 10%
When you apply for a new credit account — such as a credit card, mortgage, auto loan, personal loan, student loan, line of credit, or other type of credit — the issuer or lender conducts a hard inquiry on your credit report through one of the three major credit bureaus (Equifax, Experian, and TransUnion). The inquiry affects the new credit component of your credit score, whether or not you’re approved for the loan or card.
How Else Can New Credit Hurt Your Credit Score?
Applying for new credit not only influences the new credit component of your credit score, but other aspects as well.
By opening a new account, you increase your credit utilization. However, by using that available credit, you can potentially cause your credit score to decrease.
Experts suggest that you should keep your credit utilization to 30%, meaning if you have a credit card with a credit limit of $1,000, you should charge a maximum of $300 to the card. If you open a new account and charge more than 30% to the card, your credit utilization will take a hit.
This can easily happen if you take advantage of balance transfer offers. If you transfer a balance that uses more than 30% of your credit limit, you can expect to see your score decrease. In these situations, it’s important to use your judgement. In some cases, it may be worth it to take advantage of a 0% balance transfer deal, even if it means that your score will drop slightly for a short amount of time.
Length of credit history
New credit decreases the average length of your credit history, which can cause your credit score to go down. The average length of your credit history takes into consideration your oldest account and the average age of all of the accounts with your name on them.
Lenders and credit card issuers like to see that you have a long history of positive credit usage. When you apply for new credit, the average length of your credit history gets younger, meaning you may not be considered as appealing of a borrower as someone with a longer credit history.
How Can New Credit Help Your Credit Score?
It may seem all doom and gloom when it comes to new credit, but applying for a new credit account can have some benefits as well.
Whether or not you pay the bills on your credit accounts on time is the single most important factor of your credit score. If you have poor payment history on an older account and are able to secure a new one, you can begin to boost your credit score if you maintain a positive payment history on the new account.
This does not mean that you should neglect your older accounts. If you are struggling with debt, try to make at least the minimum payment by your due date or break up your payments into smaller amounts throughout the month so you don’t have to pay a larger amount all at once.
While new credit can negatively impact your credit utilization, it can also positively affect it if used correctly. If you open an account and maintain a maximum credit utilization of 30%, this will help your score. Particularly if you keep charging the same amount to credit as you had been and stay vigilant on your new account, your overall credit utilization will actually decrease, further improving your score.
If the new credit account that you are applying and approved for is a different account type than one already on your credit report, it will diversify your credit mix. For instance, if credit cards are your only forms of credit, taking out a personal or auto loan can temporarily ding your credit score, but will ultimately build credit mix.
By diversifying your credit mix, you show lenders and creditors that you can handle several different types of accounts. In lenders’ eyes, this lowers your risk as a borrower and increases the chance that you will get approved for a loan, credit card, or line of credit.