New credit makes up 10% of a FICO® Score. When you apply for new credit, inquiries remain on your credit report for two years. FICO Scores only consider inquiries from the last 12 months.
People tend to have more credit today and shop for new credit more frequently than ever. FICO Scores reflect this reality. However, research shows that opening several new credit accounts in a short period of time represents greater risk - especially for people who don't have a long credit history. Your FICO Scores take into account several factors when looking at new credit.
Here are the 3 things to look at for the new credit factor:
How many new accounts you have
Your FICO Scores look at how many new accounts you have by type of account. They may also look at how many of your accounts are new accounts.
Don't open new accounts too rapidly.
If you've been managing credit for a short time, don't open a lot of new accounts too rapidly. New accounts will lower your average account age, which will have a larger effect on your FICO Scores if you don't have a lot of other credit information. Even if you have used credit for a long time, opening a new account can still lower your FICO Scores.
How many recent inquiries you have
An inquiry is when a lender makes a request for your credit report or score. Although FICO Scores only consider inquiries from the last 12 months, inquiries remain on your credit report for two years. FICO Scores have been carefully designed to count only those inquiries that truly impact credit risk, as not all inquiries are related to credit risk.
There are 3 important facts about inquiries to note:
- Inquiries usually have a small impact
- Many types of inquiries are ignored completely
- The score allows for "rate shopping"
Remember: It's OK to request and check your own credit report.
Checking your credit report won't affect your FICO Scores, as long as you order your credit report directly from the credit reporting agency or through an organization authorized to provide credit reports to consumers, such as myFICO.
How long it's been since you opened a new account.
This is the age of your most recently opened account. Your FICO Scores may consider the time that has passed since you opened a new credit account, for specific types of accounts.
How new credit can lower FICO Scores
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 increase FICO Scores
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.
You should carefully consider if you need a new credit account. In the next section, you can learn about how to improve your FICO Score.
