Taking On New Credit and Your Credit Score

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Bethany Hickey is a Content Manager and Writer for Auto Credit Express, CarsDirect, and many other automotive blogs. She's a graduate from the University of Michigan-Flint, with a bachelor’s in English-Writing. 

, Content Manager - August 17, 2020

When you apply for new credit, it can impact your credit score, but it's usually minimal. We’ve got tips on applying for new credit, and what new credit can do to your credit rating.

Applying for New Credit

Whether you’re looking to apply for a credit card or an auto loan, both can lower your credit score temporarily.

When you apply for a new line of credit, the lender “inquires” about your credit reports, which means they request and review your credit reports. This is called a hard inquiry, and it lowers your score slightly. Hard inquiries can be on your reports for two years. However, when it comes to your FICO credit score (the most commonly used credit scoring model by lenders), hard inquiries only impact your credit rating for up to 12 months.

The reason why applying for new credit or taking on new credit affects your credit score is because studies have shown that borrowers that rely too much on credit tend to be higher risk. Translated, this means that borrowers who are always applying for new credit cards or new car loans may be relying too much on borrowed money, and run the risk of overextending themselves and may struggle to pay back that borrowed money later. This is why FICO keeps track of how often you apply for new credit, but it doesn’t hurt your credit rating long term.

There’s also a way to look for the best deals when it comes to taking on new credit while lessening the impact on your credit score.

Rate Shopping: Being a Smart Borrower

Rate shopping means you’re applying for the same type of new credit multiple times within a short period of time. Say you’re looking to finance your next vehicle. You talk to three different auto lenders within two weeks, since you’re looking for the best deal. The credit reporting agencies can see that you’re shopping for the same type of credit, so only one hard inquiry impacts your credit score.

Most credit scoring models don’t punish those who rate shop. To lessen the impact of hard inquiries, talk to multiple lenders within a short window of time – typically around two weeks.

However, rate shopping doesn’t work if you talk to different types of lenders: like a mortgage lender, then a credit card lender, and then a car lender. They have to be for the same type of credit in order for only one hard inquiry to have an effect. Otherwise, your credit rating is going to reflect those three hard inquiries within two weeks, which could really lower it.

How New Credit Impacts Your Credit Score

After you apply for new credit, the hard inquiry hits your credit score. It lowers a little, generally anywhere from five to 20 points, but this can vary a lot. However, it only impacts your credit rating for up to 12 months and falls off your reports after 24 months, so rest easy that it won’t haunt you for seven years like other credit situations can.

New credit can also increase your FICO credit score. This is because there is a category called credit mix, and it makes up 10% of your credit rating. This category keeps track of the different kinds of credit you’re using, like installment loans vs. revolving credit. Installment loans are loans that you pay back over a set period of time, like an auto loan. Revolving credit, like a credit card, is when you have a borrowing limit and you make a minimum payment each month until the balance is paid off.

If you only have one type of credit or only one account being reported on your credit reports, it could lead to a lower credit score. Having a good variety tells the credit scoring models that you can handle multiple lines of credit, so keeping those varied credit types in good shape can help improve your credit.

After a little time has passed since you’ve taken on new credit, the payment history on it can also improve your credit rating. If you take out a car loan, and you maintain a good payment history (which makes up 35% of your FICO credit score), it can really boost your credit score. The same goes for a credit card, if you tend to keep the balance below 30% and you make your monthly payments on time.

By having a variety of credit types on your credit reports, maintaining a good payment history, and not overextending yourself or applying for too much credit, your credit rating reflects this. Having a good credit score means qualifying for better loan rates, and overall, increasing your chances of getting approved for new credit.

Check Your Credit Reports

Looking at your own credit score or credit reports doesn’t harm your credit rating. This is called a soft inquiry, and it doesn’t lower or increase your credit score at all. To find out what your credit reports are saying about you, you can request them from www.annualcreditreport.com, for free, once a week until April 2021.

Due to COVID-19, the credit reporting agencies are opening up everyone’s reports. After April 2021, you’re entitled to one free copy of your credit reports every 12 months. Take advantage of this and review your credit reports as much as you’re able, since one mistake can stand to lower your credit rating.

Before you apply for new credit, you should review your credit reports from each of the three major credit bureaus: TransUnion, Experian, and Equifax. They can report different accounts, so compare each of them thoroughly. You should know what your credit reports are saying about you, since a prepared, informed borrower is a smart one!

Taking On a Car Loan

Auto loans are often a way for new borrowers to start their credit history off strong. Since car loans are large amounts, and often take years to pay off, many borrowers start to establish a long-standing payment history with an auto loan.

If you’re a new borrower who's ready to begin your credit history with a car loan, but you’re not sure where to start, look to us at CarsDirect. We’re connected with dealers across the country that are signed up with auto lenders that can work with borrowers in all types of situations.

Skip the hassle of running around town and looking for a dealership – fill out our free car loan request form, and we’ll look for a dealer in your area for you.


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, Content Manager

Bethany Hickey is a Content Manager and Writer for Auto Credit Express, CarsDirect, and many other automotive blogs. She's a graduate from the University of Michigan-Flint, with a bachelor’s in English-Writing. 

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