At a Glance
Credit is a useful tool for anybody, but it’s always possible that new credit is required. Whether you are trying to make a new purchase or simply gain access to more funds, taking out new credit can help. Learning everything there is to know about taking out more credit along with how it impacts your credit score can help you make a more educated opinion.
In this article, you’ll learn:
What is new credit?
For those who are unfamiliar with credit, taking out new credit can be a confusing concept. Put simply, all new credit refers to taking out a new type of credit, such as a line of credit or loan, that you did not have before. Anything ranging from a new credit card to a home equity loan can qualify as new credit. However, taking on any form of credit can also have long-standing impacts on your credit score, so understanding how much a new credit card affects a score, along with other forms of new credit, can be beneficial.
How does new credit affect your credit score?
While the new credit definition is helpful, it doesn’t assist a person in determining how taking out new credit will affect their credit score. Generally speaking, anytime you apply for new credit you will likely see a couple point drop in your credit score. This is due to the fact that most lenders perform a hard credit check, which involves requesting access to your credit report from the credit bureaus.
A hard credit check typically reduces your score by a few points, but this can be recovered in as little as a couple of months. In the long term, when wondering if new credit hurts credit score results, the answer is no. The credit bureaus actually want to see a borrower having multiple types of credit associated with their account. Additionally, the more credit you have, the higher your total credit availability is. If your borrowings remain constant, your credit utilization will be lower which will also help your score.
How do new credit inquiries affect your credit score?
As mentioned, when you apply for new credit it is extremely likely that there will be a hard inquiry into your credit report. Therefore, in looking at how much does opening a new account affect credit score, the answer is that there will be a short-term drop by a couple of points. A drop from opening a new credit file will only last for a few months, however, as it isn’t a decrease due to serious credit problems.
Learn more: Do Credit Inquiries Affect Your Credit Score?
When should you apply for new credit?
The only time you should consider looking into questions such as what is new credit or does opening a new account hurt credit is if you really need the credit. For example, if you notice the majority of your monthly expenditure is on food then taking out a new credit card geared towards cash-back on food could be a smart choice. Alternatively, if you’re looking to purchase a home then you will most likely need to take out a mortgage. In looking at what is considered new credit, there are a variety of items, but you should only ever take out what you absolutely need.
After successfully opening a new credit account, it will begin appearing on your credit report immediately. You may not see the short-term effects on your credit score until a new score is generated, which typically occurs on a monthly basis.
Believe it or not, the question isn’t how many accounts are too much, rather how many accounts are too little. A major factor of your credit score is your credit mix, which refers to the types of credit accounts you have. Having too few credit accounts can actually slightly hurt your score.
The primary benefits of new credit are access to funds that you need and the ability to bolster your credit score in the long-run, assuming you practice healthy credit habits.