What Makes Up Your Credit Scores? Part 5: New Credit

June 4, 2019

Shawn Lane

Consumer Credit Expert

When you apply for a new loan or credit card, you give the lender permission to check your credit report. This credit report access is known as an inquiry. What you might be surprised to learn is that inquiries have the potential to hurt your credit scores. 

Keep reading for a breakdown of this final category of information that makes up your credit scores. Once you learn how credit checks can impact you (and why), you’ll be better able to protect your scores from damage. 

A Brief Refresher
90% of a FICO Score is based on the following information from your credit reports:

·     Payment History – 35%
·     Amounts Owed – 30%
·     Age of Credit – 15%
·     Credit Mix — 10%

The final credit report category, New Credit, is worth just 10% of your FICO Score. 

So, while inquiries may impact your credit scores, they typically don’t influence them very much. That isn’t to say inquiries don’t matter. But, it’s important to keep the weight of this category in mind when you’re focusing on ways to try to improve your credit. 

New Credit 
Why do FICO’s credit scoring models care how often you apply for new credit? The answer is simple to understand. It’s all about risk. 

When you apply for or open too much new credit within a short period of time, it can be a red flag. According to FICO, research shows that opening numerous accounts in a short period of time indicates a higher risk that you might become 90 days late on a credit obligation within the next 24 months. This is especially true for people with shorter credit histories. 

What Matters in the New Credit Category?
There are two types of inquiries which appear on credit reports — hard and soft. 

Soft inquiries typically occur when you check your own credit or when someone you already do business with checks your credit for account maintenance. Hard inquiries usually happen when you apply for something, like a loan or credit card. 

Soft inquiries don’t impact credit scores. You can check your own credit as often as you like and there will never be any downside. Hard inquiries, however, have the potential to harm your scores.

Factors FICO considers within the New Credit category include: 

·     The number of hard inquiries on your report in the last 12 months
·     How many new accounts appear on your report?
·     How long has it been since you opened a new account?

Additionally, FICO Scores are designed to let you rate shop for certain types of loans without penalty (mortgages, auto loans, and student loans). If you’re shopping for one of these loans, multiple credit pulls within a 45-day window will only count as a single inquiry where your scores are concerned. 

Action Items
The following tips may help you to maximize your points within this category. 

  1. Only apply for new credit when you need it.  It’s fine to apply for new credit when you need financing. As long as you limit how often you let your reports be accessed, your scores should fare well within this category.

  2. Time is your friend.  Most negative items on your credit reports can remain there for seven to ten years. Inquiries are another story. Credit inquiries will only remain on your reports for 24 months. After 12 months, FICO no longer considers them when calculating your scores.

Congratulations on completing our five-part series on what makes up your credit scores. Understanding how your scores are calculated is an important step toward earning a solid credit rating. 

Remember, if you’re currently struggling with credit problems, you don’t have to face them alone. Schedule a free credit analysis with one of our credit consultants today to learn more about how Financial Renovation Solutions can help you.