3 Ways Opening a New Account Affects Your Credit
When you open a new credit account, you should be aware it will impact your credit score. In fact, opening new accounts affects your credit three different ways, some good and some bad.
Be sure to consider all these points as part of your decision of whether to apply for a new credit card.
1. New inquiry into credit report = lower score.
Whenever you apply for a new credit account, the lender will request a copy of your credit report from the rating bureaus. This is known as a new inquiry.
Each new inquiry on your account brings down your credit score by a little bit. It doesn’t matter if you decide to keep the new card or not. It’s the application that affects your score.
If you try to open many new accounts in a short period of time, it could drop your score significantly.
2. Lower average credit age = lower score
Another part of your credit score is your credit age. The rating bureaus give you a higher score for a having an older credit age as this shows stability.
They measure your credit age by two factors. First, they look at how long you’ve had your oldest account. Opening a new account doesn’t affect this factor. What opening a new account will affect is your average credit age of all your accounts.
If you have one credit card that is four years old and then open a brand new one, your average credit age drops from four years down to two years. This will bring down your score by a little bit.
3. Long-term credit utilization rate = better score
One way opening a new credit card could also help your score is by lowering your credit utilization rate. Your credit utilization rate is the amount of your credit limit you are using.
Ideally, you want your total account balances to be less than 30 percent of your credit limit. When you open a new account, it automatically adds unused credit to your limit.
If your credit utilization rate was a bit high before, this extra credit will bring down the percentage you are using. The rating bureaus will see this as a good thing.
In the long run, these three factors are pretty small compared to maintaining good credit habits like paying your monthly payments and keeping your account balances low.
Just be aware of these effects so you don’t get any surprises after opening a new account.
Photo source: netdna-cdn.com.