How new credit impacts your credit score

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The FICO credit score is composed of five key factors: payment history (35 percent), credit utilization (30 percent), credit history (15 percent), credit mix (10 percent) and new credit (10 percent).

Let’s examine what that last item — new credit — means for your credit score. As a reminder, VantageScore also considers inquiries under the “new accounts” category and counts them as “less influential” in determining your score.

This category includes the number of recently opened credit accounts and all new credit inquiries. The inquiries are those made by lenders before approving your request and will remain on your credit report for two years. They have minimal effect on credit scores, and what little impact there is typically disappears after a few months.

Generally speaking, lenders are most interested in new accounts. If there isn’t a new account in a month or two following the inquiry, the inquiry’s impact is likely to disappear, as it doesn’t represent any risk to the lender because there is no new debt associated with it.

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. Let’s take a minute to discuss what new credit is not.

Say you have a credit card with a $5,000 limit. You spend $2,500, leaving you with $2,500 of spending capacity available. You are not using new credit if you access some or all of the remaining $2,500. Your lender has already approved you for your limit, and it doesn’t matter how much or how little of it you use in this category. Of course, accessing the credit as noted here would have a serious negative effect on the credit utilization portion of your score.

Let’s say you get an offer from a lender for a new credit card, loan or line of credit. These preapproved credit offers are also not new credit (unless you take them up on the offer). These offers are just that — a pre-offer only. You still must formally apply and be approved for the credit that is being marketed.

Once you decide to apply, you have crossed into new credit territory with regard to your credit reports and score. The “new credit” category is triggered any time you apply for credit you did not have before. This includes credit cards, of course, but also auto loans and mortgages.

How do new credit accounts affect your score?

Once you have applied for a new credit card or other line of credit, you may see an increase or even a decrease in your credit score. A lot of this depends on when the items are reported. Once an application is made, it will be reported, but the timing between application and acceptance may lag, causing your score to dip temporarily due to the hard inquiry.

Although hard inquiries don’t greatly impact the average credit report, they can have a more profound negative impact on a credit file with a short credit history or few entries. These files are also called thin files. They may not cause a greater score decrease in terms of points, but when you already have a limited history and a low score, a few points could affect a lender’s decision more than it would for a person with a high score and extensive history.

But new accounts can also improve your score in a couple of ways. If you open a new credit card line but don’t access the credit, over time, this will improve your utilization and overall score. Depending on the amount of credit, you could also access a small portion of it and see your utilization increase because your credit lines are now higher.

Finally, if the new account is for a category of credit you didn’t previously have (like a car loan or other installment-type loan), you will help your credit mix, which accounts for 15 percent of your score. This is an often-overlooked strategy for improving a credit score, and it’s beneficial for those with thin credit files.

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, as well as yourself. But there are two types of inquiries — hard and soft. Only a hard inquiry counts here.

Hard inquiries are the result of your application for credit or other services. They indicate you may have additional debt that doesn’t yet show as an account in your credit report, so it represents a bit of risk to lenders. For that reason, they are shared with lenders and can have a small impact on your credit scores until the new account is added. You may see these listed in your report as “inquiries shared with others.” As noted above, only hard inquiries will affect your credit score. This also means that those preapproved offers need not concern you, as these are known as “soft” inquiries.

On your credit report, soft inquiries are shown only to you — not anyone else, like a lender — and they don’t affect credit scores or lending decisions. Some examples of soft inquiries include preapproved credit offers, requests for your credit report, requests by employers or landlords (with your permission) and insurance companies requesting your report. You may see them listed under a section titled “inquiries shown only to you.” None of these inquiries will have any impact whatsoever on this portion of your credit score.

When should you apply for new credit?

In a nutshell: 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.

If your application is accepted, you may not qualify for as high a credit line as advertised. Be wary that these offers always include language that says the offer you received is not guaranteed and will be 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, accounting for 10 percent of your FICO score. That’s why it’s important to understand the difference between hard and soft inquiries and to only apply for new credit when necessary.

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. Be sure to 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.