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Credit Score Factors: New Credit

Sarah Li Cain4-minute read
March 30, 2021

Understanding your credit score can be confusing.

Take new credit for example. Making too many inquiries or taking on too much credit within a short period of time can hurt your score. On the other hand, adding in some new credit (like opening a credit card) when you have a less-than-stellar score can help it.

The good news is that you don’t need to be a rocket scientist to figure out what can affect it and how lenders view your financial profile. There are five main factors that determine your score –  some more important than others – which lenders use to determine whether you’re creditworthy.

Let’s take a closer look at new credit and how it can affect your overall credit score.

What's Considered New Credit?

When calculating your score, credit scoring agencies (e.g., TransUnion®, ExperianTM and Equifax®) look at activity like new debts and loan applications that have been added to your credit report within the past 12 months.

More specifically, here are the factors that credit scoring agencies look at when determining new credit:

  • Number of credit inquiries you’ve made recently
  • Length of time since credit inquiries
  • Length of time since new accounts have been opened – usually by account type
  • Any positive credit information for accounts that have had previous repayment issues

How Does Opening A New Credit Card Affect Your Credit Score?

When applying for new credit cards, issuers will conduct what’s known as a hard credit inquiry. They take a look at your credit report to determine how risky you are as a borrower – i.e., how likely it will be that you’ll pay your statement balance.

Once this happens, your credit score could be negatively affected since credit scoring agencies tend to view credit inquiries as someone who is a risker borrower. That means if you make multiple inquiries, it can hurt your credit score even more.

For credit cards specifically, your credit score could go down once your credit card application is approved. When that account appears on your credit report, it may signal to credit scoring agencies that you could be a risky borrower.

However, new credit also has the ability to increase your score by helping you lower your credit utilization. This is the ratio between the amount of available credit versus how much you’re using.

The higher the ratio, the more it appears you need to rely on loans to pay expenses, hence looking like a risky borrower. In other words, the lower your credit utilization, the more it appears that you’re a responsible borrower.

Let’s say you have a credit card with a limit of $3,000 and a balance of $2,000. Your current credit utilization is 66%. Your new credit card offers you a limit of $4,000, bringing up your overall credit limit to $7,000. Without adding any new charges on the card, your credit utilization is now 28%, helping you look like a responsible borrower.

When Should You Open A New Credit Card?

Applying for many credit cards within a short time frame can negatively affect your credit score. It can look like you’re desperate for access to credit if you do so, which can suggest you’re a risky borrower.

You might want to wait a few months before applying for another credit card if you’ve applied for one recently. With a good credit score, you may be able to apply for a new credit card within 2 months or so. However, if your score is low, consider working to raise it instead of applying for a new credit score. Depending on your score, this could take you anywhere from a few months to a year.

How Can I Raise My Credit Score In 30 Days?

Here are a few suggestions you can utilize to try to raise your credit score:

  • Pay down revolving debt (such as credit cards) to lower your credit utilization until it’s ideally less than 30%.
  • Check your credit report and remove any false information.
  • Call your current credit card company and ask them to raise your limit.
  • Make on-time payments. Consider automating the process if you’re having trouble with this.
  • Call your creditor to rescind a reported delinquency if you miss a payment by 30 days or more so it doesn’t appear on your credit report.

Bottom Line

Understanding factors that affect your score, including new credit, will help you increase it. A good credit score can be useful for new loans, credit cards and other things like landing your dream apartment. That’s why it’s important to ensure you don’t engage in behaviors that could negatively affect it, like making too many hard inquiries.

To know where you stand, you need to monitor your credit score so you’ll know whenever it goes up or down. Tools like Rocket HomesSM can help you for free, as well as the Rocket HQ credit resource center.

Sarah Li Cain

Sarah Li Cain is a freelance personal finance, credit and real estate writer who works with Fintech startups and Fortune 500 financial services companies to educate consumers through her writing. She’s also a candidate for the Accredited Financial Counselor designation and the host of Beyond The Dollar, where she and her guests have deep and honest conversations on how money affects our well-being.