Although “New Credit” comprises just 10% of your FICO® Score, how you obtain new credit and how it affects your other credit score factors determines what your score will be.
Your FICO Score is made up of 5 factors:
FACTOR % of SCORE
Payment History 35%
Amounts Owed 30%
Length of Credit History 15%
Credit Mix 10%
New Credit 10%
These factors, though seemingly working alone, actually work together to determine your score – especially when it comes to new credit. Some factors (depending on your actions) can move your credit score up while others can move it down.
How New Credit Can Lower Your FICO Score
- When applying for new credit, an inquiry is placed on your credit report. That means, for instance, if you’re trying to get a new credit card, the lender will “inquire” into your credit report from one of the three major credit agencies. Depending on the other factors in your report, this inquiry can lower your score by a few points.
- A new credit card or line of credit will also affect your length of credit history. This part of your score is made up of your “oldest” account and the average of all your accounts. Opening new credit lowers the average age of your total accounts. This, in effect, lowers your length of credit history and subsequently, your credit score.
- New credit, once used, will increase the “amounts owed” factor of your credit score. Amounts owed is composed of credit utilization – the ratio of your credit balances to your credit limits. Very often, the lower your credit utilization (how much credit you’re using compared to your total credit limit), the higher your credit score. When you open and use a new credit card or line of credit, you’re getting closer to your credit limit, which could mean a lower score.
How New Credit Can Help Improve Your FICO Score
Okay, we said when it comes to new credit there are ups and downs. Enough of the downs… here are some ups.
- If the new line of credit helps diversify the types of accounts you currently have, this can increase the “credit mix” factor of your credit score. It shows lenders you can obtain and manage different kinds of credit, which can lower their risk of lending you money.
- Let’s say you open a new credit card account (which could initially lower your score) and then don’t use that card for any new purchases. Over time, this can lower your credit utilization which could mean an increase in your credit score.
- If you have a bad “payment history” and are starting from scratch to create a positive one, then opening new credit can help with that. If you can prove to lenders that you can pay your bills on time, this will help increase your score in the long run.
IMPORTANT: Don’t open too many new accounts within a short period of time. For those with short credit histories or little credit information, opening a number of accounts too rapidly can lower your credit score. For those with long credit histories, lenders might see new accounts opened in quick succession as an urgent need for credit. This could not only lead to credit denials, but also to a lower credit score.