Understanding New Credit

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When you open a new credit card or loan, the credit bureaus might apply a strike against you.  To creditors, having too much new credit may mean that you’re taking on too much risk.  And as new credit represents 10% of your credit score, it’s certainly not the biggest part of the pie chart, but you certainly can’t discount it.

What is New Credit?

Whenever you open up a new credit card account or loan, you have new credit.  Simple as that.  Each new account gets assessed as an inquiry in your report.  For example, an Experian report from the credit bureaus provides creditor, business type (e.g. bank cards, mortgages), inquiry date, and removal date.

Though this isn’t the biggest factor in the credit score, any new credit is an important one.  It tells the lender if you’re taking on too much debt in the short run.  Or think of it this way – would you lend money to someone opening too many accounts?  Too many new accounts could raise red flags and a lender would hesitate in offering products.  FICO research had studied new debt and found that people take on too many new debts are likely to be delinquent.

What’s interesting to know is that new credit inquiries only last for 2 years.  If you’re past the 2-year mark for an inquiry, this transaction gets removed.  Check the removal date for your inquiries and you find when the credit agencies will remove it.

What Makes Good New Credit?

Having no or fewer new credit inquiries could help your credit score.  By showing creditor and lenders that you manage new credit effectively, they’ll see you as having a responsible credit history.  Take the time to look over your past inquiries. 

For people who have 2 or less new credit in the past two years, lenders could be less hesitant about lending money.  

Types of Credit Checks For New Credit

In most cases, when a lender checks your credit, it can come in the form of a hard inquiry or a soft inquiry. The types of credit checks do matter since they can affect your goals.

Hard Inquiry

Hard inquiries create a mark in your credit that will lower your score fractionally.  This will negatively impact your score in the short run.   Typical hard inquiries occur when you apply for new credit cards.  If you are applying to a new card, take a look at your credit details to make sure you don’t have too many.

Hard Inquiry Examples:

  • Mortgages
  • Student Loans
  • Auto Loans
  • Rental Applications
  • Credit Card Applications

Soft Inquiry

A soft inquiry occurs when the bank or creditor issues a background check.  Although they appear in your records, they don’t count against your credit score.  The soft inquiry has no real detrimental effect on your credit score.  Sometimes the soft inquiry is a preliminary step for lenders to check your background.

If you’re applying for a bank account, you might want to check if they have a hard or soft pull on your credit.  

Soft Inquiry Examples:

  • Bank Applications
  • Insurance Quotes
  • Debt Settlement

New Credit Strategies

Apply For Fewer Cards

The proper strategy is to not open too many cards in a short time frame.  Applying for 10 different credit cards will obviously get you in trouble. While maybe one or two applications may not be views as negative. Too much new credit tells lenders that you may be desperate. 

To make sure that you’re on the right path, routinely monitor your score.  Free services like Experian and Credit Karma will give you detail information on inquiries or new accounts.  If you’re seeing too many new accounts, hold back on getting new credit. 

Plan out when you want to apply for the next loan or credit.  Consider the most important loans first and start applying based on the more pertinent loans needed.

Check for Incorrect New Accounts

If you’re a subscriber to a credit score service or credit bureau, you should be able to check your new accounts and hard inquiries.  If you find an item that is incorrect, the service may allow you to dispute the error on your statement—or, at least refer you to the credit bureau like Experian to challenge the incorrect line entry.

The credit agencies may take time on this but it will be worthwhile to make sure that you remove any negative data.

Summary

New credit is important and it might effectively lower your score if you open up too many accounts.  Tackle new credit in the order that is most important for you so you can find a nice balance on new account creation over the years.  If you’re not sure of your new account history, make sure you sign up for a least a free credit score service and map out your credit plans.

More Information

Understanding Length of Credit History

Understanding Payment History On Your Credit Report

Understanding Credit Mix

Understanding Credit Utilization

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