How Can New Credit Impact Your Score? Find Out Now

Maintaining a good credit score is crucial for obtaining better terms on loans, mortgages, and even rental agreements. 

However, many people don’t realize how the simple act of applying for new credit can affect their existing credit score. 

Understand in detail what is considered new credit, how it impacts your score, and in which situations it might actually be advisable to apply for new credit.

You will gain a much clearer understanding of how to manage your finances smartly without harming your score. Check it out!

What Is Considered New Credit?

When we talk about “new credit,” it’s common to think only of getting a new credit card or loan approval, but the concept goes much further than that. 

New credit refers to any form of credit that you didn’t previously have and that has been added to your credit report. This includes:

• New Credit Cards: When you apply for and receive a new credit card, it is considered new credit.
• Personal Loans: Any loan you take out, whether to pay off debts, finance a car, or cover other expenses, also falls into the category of new credit.
• Lines of Credit: If you obtain a new line of credit, even if it’s a line of credit for home renovation or a small business, it’s also considered new credit.
• Mortgages: Buying a car or a house through financing also creates new credit in your name.

The main characteristic of new credit is that it represents a potential new debt. When you open a new credit account, you are taking on the responsibility of paying that amount in the future, and this can have various implications for your credit score.

Understand How New Credit Impacts Your Score

Applying for new credit can have a direct impact on your credit score, either positively or negatively, and this happens for several reasons. Here are some of them:

Initial Impact on the Score

Whenever you apply for new credit, the financial institution checks your current credit report, which results in a “hard inquiry”. 

These hard inquiries are recorded on your credit report and temporarily lower your score. 

Although the impact of a single inquiry is generally small, multiple inquiries in a short period signal to lenders that you are aggressively seeking credit, which may be seen as a risk.

Reduction in the Average Age of Credit Accounts

When you add a new credit account to your financial profile, it reduces the average age of your credit accounts. The age of credit accounts is a key factor in your credit score. 

A lower average age can suggest that you have less experience managing credit, which lowers your score.

Increase in Credit Utilization Ratio

New credit can increase the total available limit, but it can also raise the credit utilization ratio if you start using the new credit immediately. 

The credit utilization ratio is the relationship between the credit you are using and the total available credit. 

Keeping this ratio below 30% is generally recommended because a higher ratio indicates that you are too reliant on credit, which negatively impacts your score.

Potential Positive Long-Term Impact

On the other hand, new credit can positively impact your score in the long term, especially if you manage the new account well. 

Paying your bills on time and maintaining a low credit utilization ratio help you increase your score over time. 

Diversifying the types of credit you have can also be beneficial for your credit profile with the bank.

Can Credit Inquiries Impact My Score?

Credit inquiries play an important role in the initial impact of new credit on your score, so always pay attention to them. There are two main types of credit inquiries:

Soft Inquiries

Soft inquiries occur when you check your own credit or when companies do a pre-approved check without you having applied for new credit. 

These inquiries do not affect your credit score and are common when you receive pre-approved credit card and loan offers.

Hard Inquiries

Hard inquiries occur when you formally apply for new credit, such as a credit card, loan, or mortgage. These inquiries are recorded on your credit report and reduce your score temporarily. 

The effect of these inquiries can last up to two years, although the greater impact is in the first few months.

Avoiding multiple hard inquiries in a short period is essential to maintaining a healthy credit score. If possible, plan your credit applications by spacing them out over time, minimizing the negative impact on your score.

Understand When It’s Advisable to Apply for New Credit

While new credit has implications for your credit score, there are times when applying for new credit can be beneficial or even necessary. 

So, when is it advisable to apply for new credit? Below, you can check some situations where considering new credit is a good idea:

When Planning a New Purchase 

If you’re planning a big purchase, like a car or a house, applying for new credit might be necessary to finance the purchase. 

Before doing so, make sure your credit score is at a healthy level and that you can manage the monthly payments without compromising your finances.  

With a Good Credit Score

If your credit score is already high, the impact of applying for new credit will be smaller, and you will likely qualify for better interest rates and terms. 

In this case, new credit helps diversify your credit profile and, over time, further improve your score.

When You Are Pre-Approved

Pre-approved credit offers are a good opportunity to obtain credit on favorable terms. 

However, even if you have been pre-approved, it’s important to consider whether you really need the new credit and if you can manage it effectively.

To Build a Credit Profile

If you’re starting to build your credit history, new credit can be a useful tool. A secured credit card or a small loan can help establish a payment history, which is crucial for building a good credit score. 

Just make sure to use credit responsibly by paying bills on time and keeping a low credit utilization ratio.

Applying for new credit is a double-edged sword for your credit score. On one hand, it can provide the financial resources needed for big purchases or debt consolidation. 

On the other hand, it temporarily lowers your score and increases your financial responsibility. 

 

By understanding how new credit affects your score and in which situations it’s really advisable to apply for it, you can make more informed decisions and protect your financial health in the long run. 

Always consider your reality, your payment capacity, and the impact on your score before opening a new line of credit.