How Does New Credit Influence Your Score?
According to FICO, one of the leading credit-scoring companies, the “new credit” category makes up about 10% of your total credit score. This category evaluates how you manage new debt by looking at several key questions:
- How many new accounts do you have? Opening several new credit lines in a short period can signal increased risk to lenders.
- How many recent hard inquiries are on your report? A hard inquiry occurs when a lender checks your credit after you’ve applied for a loan or card. Too many can temporarily lower your score.
- How much time has passed since you opened a new account? The impact of a new account lessens over time as you establish a positive payment record.
Applying for new credit typically causes a small, temporary dip in your score. Lenders see multiple applications as a potential sign of financial distress. However, once you begin making on-time payments, the new account helps build a positive payment history, which can strengthen your score in the long run.
What Qualifies as New Credit?
New credit isn’t limited to credit cards. It includes a variety of financial products that require a credit check for approval:
- Credit Cards: Applying for a new rewards card, balance transfer card, or retail store card.
- Installment Loans: This includes auto loans, mortgages, student loans, and personal loans, where you borrow a fixed amount and repay it over time.
- Lines of Credit: Such as a Home Equity Line of Credit (HELOC), which allows you to borrow as needed up to a certain limit.
It’s important to distinguish between hard and soft inquiries. Checking your own credit or receiving pre-approved offers are soft inquiries and do not affect your score. Only direct applications for new credit result in hard inquiries.
How to Manage New Credit Strategically
Properly managing new credit applications can help you build your financial profile without significant negative effects. The key is to be deliberate and strategic.
For example, when shopping for a major loan like a mortgage or auto loan, credit scoring models provide a “rate-shopping” window. According to the Consumer Financial Protection Bureau (CFPB), multiple inquiries for the same type of loan within a 14 to 45-day period are typically treated as a single inquiry. This allows you to compare offers from different lenders without repeatedly dinging your credit score.
Here are some best practices for handling new credit:
| Good New Credit Habits | Bad New Credit Habits |
|---|---|
| Space out applications by at least a few months to allow your score to recover. | Apply for multiple, different types of credit in a short time frame. |
| Only apply for credit that you genuinely need and can afford. | Open new accounts just to get a one-time discount or sign-up bonus. |
| Keep the balance low on new accounts to maintain a healthy credit utilization ratio. | Max out your new credit line immediately after opening it. |
| Always make on-time payments to build a positive history. | Miss payments on the new account, which can cause significant damage. |
Frequently Asked Questions About New Credit
- How long does a new credit inquiry affect my score?
- A hard inquiry stays on your credit report for two years, but its impact on your FICO® Score typically diminishes after a few months and disappears entirely after one year.
- Is it always bad to apply for new credit?
- No. Strategically applying for and using new credit is essential for building a robust credit history. Without it, you can’t demonstrate your creditworthiness for future financial goals like buying a home.
- Should I close old accounts when I open new ones?
- Generally, no. Closing an old account can shorten your average age of credit and reduce your total available credit, which may lower your score. It’s often better to keep older, well-managed accounts open.