How New Credit Impacts Your Credit Score

New credit only makes up 10 percent of your FICO credit score, but it can still have an unpleasant impact on your credit if you let this scoring factor fall by the wayside. New credit refers to your recently opened accounts and new credit inquiries. In particular, how many times you’ve had hard credit inquiries over the past two years and how many of your open credit accounts are new.

When lenders look at your credit profile, will they see a laundry list of hard inquiries and tons of recently opened accounts? That might be a red flag for them and bad news for your credit score.

What is new credit?

New credit is exactly what it sounds like — credit lines or loans that you applied for that you did not have before. Once you complete and submit a credit application with a lender for a credit card, loan or mortgage, you’ve crossed into “new credit” territory.

This affects your credit regardless of if your application gets approved or not. That’s because one of the things the new credit factor takes into account is the number of hard credit inquiries you have. The calculation also considers the number of new accounts you have open and how long it’s been since you opened them.

How does opening a new credit account affect your score?

Short answer: it depends.

A new credit account might not always lower your credit score and even if it does, other factors like your credit utilization ratio, or credit mix may outweigh any initial drop in your score.

After applying for a new credit card or other line of credit, you could see an increase or a decrease in your credit score. Part of that depends on when each item is reported. If the timing between the hard inquiry and your new credit account lags, you could see a temporary drop of a couple of points from the hard credit check. That could change relatively quickly once your new credit card or other account is reported as open.

For example, if you open a new credit card and only ever use a small portion of your new credit limit, you’ll see your credit utilization improve, which boosts your score over time. Similarly, if you only had credit cards under your credit profile before, and recently got approved for a personal loan, it would improve your credit mix — and eventually, your score.

How do new credit inquiries affect your score?

Inquiries are simply a record that someone with a permissible purpose has asked for your credit report under the law. They may be credit grantors, employers, insurance companies and lenders, or yourself. But there are two types of inquiries — hard and soft. Only a hard inquiry counts here.

Hard inquiries generally don’t have a large impact on your credit report with a few exceptions. In most cases, one hard inquiry will only cost you about 2 to 10 points depending on your credit report. The impact of that inquiry usually diminishes after 12 months before falling off your report at the two-year mark.

However, hard inquiries might have a more profound negative impact on someone with a limited credit history or few entries. It doesn’t take away extra points compared to someone with a more extensive credit file. There’s just less information in a thin credit file to balance out the effects of that credit check.

What can get you in a bit of hot water is running multiple hard inquiries in a short timeframe. Let’s say you applied for three credit cards, a personal loan and a car loan in the span of 6 months. You’d likely see your credit score take a dive, plus it’s a big red flag for lenders.

Applying for too much credit at one time makes you look like a risky person to lend money to. Lenders are more likely to deny you if they notice a ton of new hard inquiries on your report whether you’ve been approved or denied for those applications.

Rate Shopping

The one time that doesn’t apply is when you’re rate shopping for loans. It could be a mortgage, auto loan, personal loan or student loan — but not credit cards. In these situations, FICO and VantageScore treat inquiries related to the same loan type as one inquiry as long as those applications occurred within its time constraints. That allows you to search for the best rates and terms without being penalized for having too many inquiries.

With the current version of FICO, all inquiries related to the loan you’re looking for would need to be done within 45 days to count as one inquiry. However, some lenders still use older versions of FICO which only have a 14-day window. VantageScore allows you to submit applications within a rolling 14-day window. To play it safe, try to complete all of your inquiries within 14 days.

If you want to compare the best credit cards without damaging your credit score, you could use prequalification tools with your preferred issuer or consider using Bankrate’s CardMatch to find the cards that match your credit profile without a hard pull.

When should you apply for new credit?

Only apply for new credit when you can ensure you qualify for it and truly need it. You should always approach any new credit carefully and have a plan for repaying your debt.

Be aware that you may not qualify for as high a credit line as advertised, even if your application is accepted. These offers always include language that says the offer you received is not guaranteed and is based on information in your credit report.

It’s helpful to check your credit reports regularly, and you can do this for free at AnnualCreditReport.com. You may also have access to scores and reports through your bank.

The bottom line

New credit can have a significant impact on your credit score, even though it only accounts for 10 percent of your FICO score. Hard inquiries and new credit accounts are the primary factors that go into that calculation. So it’s important to monitor how often you allow lenders to pull your credit and be judicious when applying for new credit.

While opening a new credit card or other line of credit may temporarily decrease your score, it can also improve your utilization and credit mix in the long run. Regularly check your credit reports for accuracy and approach new credit carefully with a plan for repayment. By staying informed and responsible with your credit, you can maintain a healthy score and financial future.