New Credit Can Sink Scores Whether or Not You Open the Account |
By Kenneth Long on June 1, 2010
.jpg.aspx?width=75&height=75) New credit is a classification of inputs in the credit scoring formulas developed by Fair Isaac Corporation. This component of credit scoring impacts about 10% of the scoring formulas.
Every time that you open a new credit account, your credit scores take a small dip. Your credit scores will also drop when you apply for new credit, even if you don't actually open the account. An application for credit can prompt an inquiry into your credit history.
The typical drop in scores is anywhere from one to five points for each inquiry. How much your scores drop depends on how developed your credit history is as well as how many inquiries you have had recently.
Not all inquiries affect your credit scores. Credit checks that do not involve a request for credit have no impact on your credit scores. These benign credit checks are sometimes referred to as soft inquiries.
Soft inquiries can include checks by prospective landlords, employers and even insurance companies. If you pull your own credit report, this also has no effect on your credit scores.
All credit checks associated with applications for new credit result in hard inquiries. The penalty for opening a new credit account is slight, but it can take many months for the account itself to age to the point that the penalty is offset by positive duration. An account is not even considered seasoned until it has been maintained for at least two years. Therefore, it is advisable to avoid opening any new accounts within a year prior to applying for a new mortgage.
When applying for a mortgage loan, an interesting exception occurs. All inquiries for a mortgage loan that occur close together collectively count as only one inquiry. This gives you an incentive to shop around for the lowest rate without hammering your credit score in the process. Vehicle loans are similarly grouped together. Older scoring models gave you two weeks, while newer formulas allow for a 45 day window for these inquiries.
Credit scoring formulas only count inquiries for the first two years, after which they drop off of your credit history. Recent inquiries in the last 12 months are counted more heavily, especially if you have many.
Applying for new credit is unavoidable as you try to establish your credit and fulfill your credit needs. To minimize damage, avoid trying to open more than one account within a six month window. Once you have established an ideal mix of accounts, only open new accounts when it is truly beneficial to do so.
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