When a lender pulls your credit or FICO score, one of the factors impacting that score is new credit. Since everything that influences your score in either direction is important to the type of interest rate you’ll get, it’s essential to understand how new credit will affect your score. New credit includes both new credit accounts you secure and new credit inquiries regardless of the outcome. Let’s take a closer look.
What is new credit in the eyes of the credit reporting bureaus — the ones who help determine your score? New credit refers to new accounts that you get, such as:
- Credit card
- Personal loan
- Car loan
- Mortgage loan
- Home equity line of credit
If you apply for, are approved for, and agree to any of these forms of credit, you now have a new credit account.
What New Credit is Not
Some people may be confused about some things that may seem like new credit, but are not. For example, if you have $2,500 available on a credit card, and you decide to access $1,000 of it, you did not use new credit. You already had that credit amount. Now, this will change your credit utilization ratio, but that is another issue altogether.
Another thing that could be confusing for people is when they are approved for a loan, such as a mortgage, but don’t end up purchasing a home. Since they didn’t actually access the funds from the approved loan, they don’t have a new credit account. Only if and when they close on the house will they have a new credit account.
Also, when you receive advertisements in the mail saying you’re pre-approved for a credit card, that is not new credit unless you apply for it and are approved.
How Does New Credit Effect Your Score?
When you apply for credit, your credit receives a hard inquiry check. This can cause your score to dip a few points. However, a hard inquiry for a loan or credit card is not considered a “true” negative, so you shouldn’t see the decrease in points for very long. Some people may not even see a decrease because of how the new credit line will bump up their credit utilization ratio. Credit utilization ratio is calculated by dividing your total balance by the total credit limit available, then multiplying by 100 to arrive at the percentage. The ideal place you want to be is 30% or less.
If you have several accounts already but are using 30 % or more of your available credit, then adding to your available credit limit by getting new credit will increase your score. The reason for this is that it will help bring the credit utilization ratio down. So, even if the hard inquiry knocks your score by a couple of points, the reduced utilization ratio can boost it by even more, making it a net gain for you. However, suppose you’re already not using much of your available credit, and the credit utilization ratio is not a factor for you. In that case, the new account could bring it down temporarily due to the hard inquiry.
When determining whether you should get a new credit account or not, it’s best to have a professional analyze your credit for you to see where you’re at. At Credit Diva of Dallas, we will check out your credit and help repair any damages. Once your credit is in good repair, you can consider what options are best for moving forward. Credit Diva is here to help you keep your credit in excellent shape. Get in touch with us today.