In this 5th part of a series, we’re looking at the final factor in one’s credit score: New Credit.
“New Credit” accounts for 10% of your score, like “Types of Credit Used.” However, FICO has suggested that “New Credit” is the more important of the two factors.
Inquiries for new credit have their own section on your credit report. The only inquiries that affect your score are inquiries that result from an application for new debt. Checking your own credit report, inquiries by insurance companies, and inquiries for marketing or employment purposes don’t count against your score.
Every inquiry on your report that results from a credit application will lower your score. If you are applying for mortgages or auto loans and you shop around with different lenders looking for the best rate, all of those inquiries will be lumped together and counted as one inquiry (as long as the inquiries occur within a 2-week period).
Once you open a new account, this impacts your score as well. That means you can lose FICO score points both for applying for credit and for opening the new account. Over time, the negative impact will lessen, but every new credit application and account opened will reset the clock on your “New Credit” information.
There is a potential positive FICO score impact from new credit. FICO includes in this category “re-establishment of positive credit history following past payment problems.” That means if you have a delinquent account and you pay off all of your past-due balances, the FICO score will look at that as a fresh start. Continuing to make on-time payments to these formerly delinquent accounts will have a positive impact on your score.
Ultimately, we all have to start somewhere, and no one can avoid having new accounts at some point in their credit history. Handle those new debts responsibly and it won’t be long before the negative impact of having new credit turns into a positive indication that you have developed good borrowing habits.
For more information on obtaining credit, check out our Wise Use of Credit course materials. We also have our “Understanding Your Credit Reports & Scores” course, which is free of charge. For a more comprehensive look at credit, download our free Consumer Guide To Good Credit, right here in the FIT Academy.
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This post is part of the Credit Score Scale Factors, a series of articles and resources designed to prepare people to become informed and responsible credit holders. View the rest of the articles here.