My Credit Score Dropped After Applying for a New Line of Credit

Credit is essential in building a solid credit rating, although applying for the credit may damage your score. Despite this quandary, garnering approval can significantly improve your rating if you make your payments on time and don't go over your limit. The impact of a new line of credit ultimately depends on how you handle it.

Credit Inquiry

Applying for new credit usually drops your credit score up to five points because of the credit inquiry. Any time you apply for credit, the creditor reports the application to the national credit reporting agencies. While the credit bureaus only factor in inquiries into credit rating for one year, six or more inquiries on a credit history is almost as bad as a bankruptcy, according to the Fair Isaac Corporation, or FICO.

Length of Credit History

Opening a new line of credit negatively impacts the average age of your accounts -- worth 10 percent of your credit rating. For example, if you have just one account for the past 10 years, you have an average age of 10 years on your accounts. A new account drops the average age of your accounts to five years. The FICO credit scoring formula considers the average age of installment accounts, such as auto loans and mortgages, and lines of credit, such as credit cards and home equity line of credits.

Debt

You may have some charges on your new line of credit before you make a purchase. For example, if you open a credit card with an annual fee, the lender may put the fee on your balance as soon as you open the account. If you have a department store credit card and open it in connection with a purchase, you will have additional charges on your first statement. Debt counts for 30 percent of your credit rating.

Tip

If you know someone with excellent credit, you can request that he co-sign on an account. Co-signing on an account usually avoids the credit inquiry. However, you must ensure that you pay the bill on time, as missed payments and other derogatory items will appear on both your credit histories. If you apply for a line of credit on your own, it should help your rating as long as you keep your balance low and never miss your monthly payment.