NEW CREDIT: HOW DOES IT AFFECT YOUR SCORE?
Posted on: Jul. 31, 2017 in Credit Score

We’ve been talking about credit scores and the factors that make them up. Today, we’re going to discuss opening new credit and the impact it can have on your score. New credit accounts for 10% of your score, so while not a huge factor, it is important. Let’s take a look.

Applying for new credit causes a hard inquiry to appear on your credit report. This will show potential future lenders that you looked into opening a card, even if you close the card right away, decline to open it, or you’re not approved. Having too many inquiries – again, whether you open the card(s) or not – looks to lenders like you may be facing financial trouble and need money desperately. Your score can go down a few points. It won’t make a huge difference if you have a high score, but if it’s low or on the edge, it could push you down into a new rating category.

New credit can also impact other factors that make up your score:

Consider yesterday’s post about length of credit history and credit age, which is the average length of history on all your cards. When you open a new card, there is no history, which will bring down your overall average. Depending on how many other cards you have and your credit age, it may not matter.

If you’re opening new credit, there’s a good chance you’re planning to use it. By charging more items, particularly if you can’t afford them, you may find yourself deeper in debt. Having a high balance can lower your score. However, new credit can also raise your total available credit, changing the dynamics of your credit utilization ratio. Because you want to try to use no more than 30% of your available credit, raising your limits without charging more an actually help.

If opening new credit means you’ll be spending more, though, be careful. Not only will you skew that utilization ratio, you could find yourself owing more than you can pay. Being unable to pay your credit cards when they’re do, or simply being late, will pull your score down incredibly fast. Even one late payment will hurt significantly.

At the end of the day, new credit alone won’t wildly disrupt your score. But it can set you on a path to help or hurt your score in other categories. Only open new credit when you need to, and don’t overdo it on the spending, and you should be able to maintain your credit score.

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