Breaking Down Credit Scores – New Credit
In Part 5 of the YouTube series, Credit Scores Broken Down, Derick Vogel discusses the final area that affects your credit score: New Credit.
New credit, also commonly referred to as inquiries, makes up a small portion of your credit score. Although it’s frequently brought up when discussing how to maintain a good credit score, it actually has very little impact on your total score.
You’ve likely heard that you need to avoid applying for credit too often or it will destroy your credit. Well, that is partially true. You can hurt your score by applying for credit too often but not by much. At most, you could lose 55 points for new credit inquiries, although it’s highly unlikely. More often than not, your typical new credit inquiries won’t take off more than 5 points.
There are two types of credit inquiries: hard inquiries and soft inquiries. Hard inquiries are the ones you get when applying for new credit. These will usually make up most of your credit inquiries. Hard inquiries will show up on your credit report when you apply for new credit like a car loan, a mortgage, or credit cards. They can have a negative impact on your credit score should you have more than one on your credit report per year – keep in mind, though, it still has very little impact.
Hard inquiries will stay on your credit report for 2 years but will no longer have an impact on your score after the first year.
The other type of inquiry, soft inquiries, have no weight on your credit score. A soft inquiry would be from checking your credit score via a credit monitoring service or a free credit check site. This type of inquiry will show on your credit report but won’t affect your score.
As mentioned previously, credit inquiries don’t have a large impact on your credit score and it would be very difficult to get a score penalty of 55 points, however, that doesn’t mean you should be careful. If you’ve just recently been approved for credit, don’t go out and keep applying for credit card after credit card just for the sake of it. Or, say you have a low credit score, making it difficult to get approved, don’t just keep applying over and over because that could further damage your score.
On a final note: One thing you should be aware of is when applying for certain loans, like car loans or mortgages, you may incur multiple credit inquiries from a single application. For instance, you may apply for financing at a car dealership and later see that you have 10 or 15 inquiries on your credit report. This is because it’s common for these institutions to “shop” you around to multiple possible lenders in order to find you the best deal. Fortunately, these inquiries will still only count as one. While shopping around for a mortgage, for instance, any inquiries made within a two week period of time will still just count as one inquiry.
If you have any questions about new credit inquiries or need help understanding your credit report and improving your score, please give us a call today.