Credit 101

How Will Opening a New Account Affect My Credit?

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How Will Opening a New Account Affect Your Credit?How a new account will affect your credit scores depends mostly on your overall credit history and on the type of new account you are opening. New accounts make up about 10% of your credit score.

First, opening a new account will likely produce a credit inquiry on your credit reports. This new inquiry may have no effect at all, or may make your scores go down slightly, depending on the type of inquiry and the number of inquiries already present on your report. Applying for credit excessively (like applying for many credit cards at once during the holiday shopping season) can almost always be expected to have a negative impact on your credit scores, as more inquiries tend to indicate higher credit risk.

In addition to the impact of new account inquiries, opening a new account can negatively impact your score in two more ways: 1) making your average credit age “younger” by adding an account with little or no history to the existing accounts on your credit report; and 2) an account with a recent “open date” on your credit report indicates to the scoring formula that a new account has been opened, which, as with inquiries and reduced credit age, indicates higher risk.

[Related Article: The First Thing To Do Before Applying For a Credit Card]

Free Credit Check & MonitoringIn the long run, adding a new credit account can help your scores if the account is unlike other types of credit you already possess, and it is paid on time. For example, if you already have credit cards and you take out your first car loan, this loan may help your scores over time by improving the “diversity” of your credit profile.

Also, adding an additional credit line to your credit history can help your scores by lowering your overall revolving credit utilization (total balances/total limits ratio), an important factor in your credit scores. This can occur when the newly added account increases your total credit availability (credit limits), more than it increases your total credit card balances — and thereby reduces this overall ratio. Conversely, if a new credit card carries a high balance, such as when transferring an existing balance to it, this can actually increase your overall revolving credit utilization — and lower your credit scores.

On the other hand, installment credit (mortgage, student, auto) utilization doesn’t have nearly the impact — good or bad — that revolving credit utilization has on scores, since this type of utilization is not nearly as significant a risk indicator. And as a result, there’s no need to worry about the impact of a new installment loan balance on credit scores in the same way you should be concerned about new credit card balances.

You can sum up the topic of new account impact on credit scores this way: Opening a new credit account can either lower, raise or have no impact on your credit scores. While it’s possible to raise your score with the addition of more available credit, and it’s possible that a new account will have no impact, it’s much more likely that you’ll see your score drop, at least slightly, when a new account is added; keeping in mind that any lost points should be regained within a few months, as the new account ages, payments are made on time and credit card balances are kept low.

[Credit Score Tool: Get your free credit score and report card from Credit.com]

Image: iStockphoto

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  • Not A Doctor

    I’ve only had one CC for 4 years, paid off student loans, and my credit score is 785. Just added a car loan ($22,500 after a large down payment), and my score dropped around 35 pts. Having just one credit card doesn’t seem to be a bad thing considering my score was in the excellent range before my car loan started.

    • ben franklin [pre death]

      True enough. But if you had 2 credit cards of the same standing, you might have been over the 800 mark and could possibly have softened the 35 pt blow of having a new loan.

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