How Does Obtaining New Credit Affect Your Credit Score?

Sometimes, you must take on debt to make your FICO credit score more attractive to lenders. A new line of credit, however, negatively affects your score as soon as you get the loan or if the bank rejects your application. Seldom should you let concern for your credit score stop you from obtaining emergency funds, but if you want to boost your score, a credit card is usually a better option.

Credit Inquiry

Any new credit account usually comes with a hard credit check because you applied for an account. A single hard check hurts your score by no more than five points, according to the Fair Isaac Corporation. But multiple checks within any 12-month period do more damage collectively than any single check, because the credit score reflects the fact that obtaining several loans within a short span of time tends to stretch a person's finances.

Credit History

You should have as long a credit history as possible on all accounts, because the FICO algorithm also considers the average age of your loans. Thus, if you had only one 15-year-old account and open a new one, your average account age goes from 15 years to 7.5 years and probably lowers your score.

Credit Mix

That new credit account could boost your score by giving you a greater mix of loans. The "mix of credit" category is worth 10 percent, and to get the maximum points out of this category you must have several revolving credit card accounts and installment loans to show you can manage several types of accounts at once.

Amounts Owed

The dollar amount of debt you owe counts for 30 percent of your score, so any installment loan or balance you put on a new credit card could have an immediate negative impact. Installment loans, however, are far less harmful to your score than credit card debt, because installment loans are usually backed, or secured, by a real asset, such as a car or home. The borrower often can satisfy the secured loan by selling the property. Regarding credit card use, credit utilization -- the amount of debt you carry relative to your credit limit -- is a factor in the "amount of debt owed" scoring category. The higher your credit utilization percentage, the more it hurts your credit score. Opening a new credit card account could affect your overall credit utilization ratio in a positive or negative way, depending on its credit limit and how much of that limit you use.

Tip

When you apply for a mortgage, auto loan or student loan, the FICO score gives you a break on the credit check by combining all inquiries in a 45-day window as one, because it assumes you are shopping around for the same loan. If you have more than seven credit cards, the FICO model starts reducing your score for each additional credit card account, so consider paying off a current credit card instead of obtaining a new line. You can become a joint holder on an account to get a new line of credit without the credit check, but you should make sure the account has never been delinquent.