New Credit Can Boost — or Bust — Your Credit Score. Here’s When to Apply
Your credit score determines your eligibility for loans, credit cards and even renting a house. Credit reports are determined by a company called FICO, which assigns a three-digit score showing lenders whether giving you a loan or a credit card is a good idea or a risky one.
Credit scores range from 300 (bad) to 850 (excellent), with anything above 700 typically seen as “good.” But it’s not always easy to get to the “good” or “excellent” ranges, especially if you’re starting from scratch or trying to improve a shaky score.
While new credit is sometimes helpful, as in my case, it can often be seen as a bad thing.
What Is New Credit?
Taking on any loan or credit card counts as new credit.
According to CreditCards.com, FICO’s new credit category takes into consideration:
- The number of accounts you’ve opened in the past 12 months
- How many recent credit inquiries you have
- How long it’s been since your last inquiry
- The length of time you’ve had your newest accounts.
You could also be dinged when an older card that had previous payment problems reappears on your credit report.
When I first moved to the U.S. from the U.K. I had no credit to my name. The first thing I did to establish myself was open a new credit card with a high interest rate and a low limit. At the time, it was all I could get. From there, I made a plan to get new credit in order to build my score gradually.
In my case, my new credit card opened the door to higher-limit cards. I used my first card to buy groceries, paying the balance off in full every month. Within a year, I was able to open a second credit card with a better interest rate that I used in conjunction with my first card to continue building my credit.
What Percentage of New Credit Factors Into Your Credit Score?
Your FICO credit score is based on five factors, which weigh differently on your score:
- Payment history
- Credit utilization
- Credit history
- New credit
- Credit mix
Of these factors, new credit only makes up 10% of your score.
Payment history and credit utilization have a heavier consequence on your score, but that doesn’t mean you should ignore the effect that adding new credit could have.
As I started to add different lines of credit to my name, like a car loan and a mortgage, I stuck to my two initial credit cards to avoid adding too many lines of credit. At the same time I was diversifying my credit and continuing to make on-time payments so my credit score wouldn’t be negatively affected.
Can Too Many Cards Hurt Your Credit?
Too many cards could hurt your credit if they are all fairly new.
FICO looks at the average age of your credit cards, and having more recently acquired cards lowers that age.
If you have a few more-established credit cards and open one or two new accounts, the effect on your score is not as bad. This is especially true if you have a history of paying loans and credit cards on time.
Since payment history counts for a larger chunk of your overall credit score than new credit does, having a couple of newer cards you pay on time could actually help your credit score, especially if you’re trying to improve it.
I eventually closed my very first credit card, but not before I added a new one and a couple of store cards (because who can resist the discounts that come with those cards?).
Will Opening a New Card Hurt Your Credit Score?
Opening a new account could hurt your credit score, especially if you add new lines of credit often.
How New Credit Can Help
Opening a new credit card could also improve your overall credit mix, which also accounts for 10% of your score. If you have a mortgage and car loan but no credit cards (or even just one), a new card helps diversify your borrowing, which shows lenders you’re trustworthy. Of course, this is only true if you make on-time payments and keep your credit utilization low.
A new credit card could actually help your score by decreasing your credit utilization.
For example, if you have a current credit card with a $10,000 limit and an $8,000 balance (i.e., 80% utilized), your FICO score will take a bigger hit because credit utilization accounts for 30% of your overall score. If you open a new account with a higher limit, your credit utilization will drop.
How New Credit Can Hurt
But be careful with opening new accounts to try to lower your credit utilization. You’re better off trying to pay down your existing high-balance credit card to lower your utilization than opening a new credit card.
Do New Credit Inquiries Hurt Your Score?
There are two types of credit inquiries: soft and hard. Only one affects your score.
A soft inquiry happens when you check your own credit score or apply for a job that checks your credit as part of the hiring process.
Credit card companies might also run soft inquiries when they check your credit to see if you qualify for an offer they want to send to you. Soft inquiries don’t affect your credit score.
Your credit card company might provide you with your credit score (my USAA card does, and that’s how I keep tabs on my credit score). You can also sign up for services like Credit Karma,
which use soft inquiries to keep you posted about your credit score without damaging it.
A hard inquiry is when a credit card or loan company checks your score when you apply for a new line of credit.
This is the type of inquiry that has a detrimental effect on your credit score. You need to give permission for a lender to make a hard inquiry. Too many hard inquiries on your credit report suggests to lenders that you’re risky, and they may make the decision to not give you a loan.
FICO keeps hard inquiries on your credit report for two years, though it only takes inquiries from the past 12 months into account when calculating your credit score. Soft inquiries do not appear on your credit report.
When Will I See a New Credit Card on My Report?
New lines of credit, along with things like missed payments, generally appear on your credit report within 30 days of the end of the billing period.
That means you won’t see a new credit card show up on your credit report immediately. You may have a couple of months, depending on your billing cycle. But you shouldn’t use that as an excuse to open a bunch at once. They might not have an immediate effect, but they’ll eventually catch up with you and make a dent in your credit score.
After 12 years of building my credit, I have a score firmly in the “good” range. New credit played a part in getting me there, but now I stay away from opening new lines of credit unless they are absolutely necessary.
In general, new credit can be helpful to your score if you use it correctly. But as with many things, abusing new credit can harm you in the long term. The best thing to do is ask yourself before opening a new credit card whether you really need it or whether you can make do with what you have.
Catherine Hiles lives in Ohio with her husband and their two children. By day she manages a team of writers and graphic designers, and catches up on her own writing in her spare time.