New credit makes up 10% of your overall FICO Score.
Using credit has become a more noticeable trend in recent years. People tend to buy on credit more often today than in the past, making lenders more skeptical when it comes to approve credit applications. Consumers have more credit today and continue to 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 some 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 credit age average and thus, lowering you overall 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 keep in mind:
Inquiries usually have a small but important impact: We have seen an average of 0 to 5 points up to 15-20 points per inquiry depending on your credit profile.
Many types of inquiries are ignored completely: Lenders only consider what they WANT to consider.
“Rate shopping”: When in doubt, check your own credit file AND, check the lenders policies to avoid surprises.
Remember: It’s OK to request and check your own credit report and, as a matter of fact, it is RECOMMENDED to check* your own credit periodically.
– *Checking your credit report won’t affect your FICO Scores, as long as you order your credit report directly from a credit reporting agency or through an organization authorized to provide credit reports to consumers, such as IdentityIQ, Privacy Guard, myFICO, and Credit Check Total.
How long it’s been since you opened a new account 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, which accounts for 10% of your overall 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. Also, any inaccuracies on your credit file, such as wrongful inquiries and/or name misspelling, addresses and/or other personal information inconsistencies, may also potentially result in a denied credit application outcome.
At Credit Services of America, we specialize in Credit Repair, Credit Trade Lines, Student Loan Consolidations, and Debt Settlement. From the very first visit, your credit file is examined thoroughly, every personal information, every address, every account, every inquiry, every line is meticulously inspected for accuracy. Within minutes, you will be able to see what your potential creditors will see and this will put you in an advantageous position in your financial future. Give us a call at 844-349-8727 to set up your FREE Credit Consultation with one of our experienced and professional credit consultants, and stop living in doubt! Your credit is your financial future, lets make it a great one!
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*Individual results may vary. Please call for more details and to discuss your own individual situation.