By now, you probably know that not all credit is created equally. New credit is one area that requires some discretion. It’s essential to understand how your actions can affect your financial health and creditworthiness. There are several moving parts at play here when it comes to the big picture of credit, at least in the eyes of data analytics company FICO (Fair Isaac Corp.) known for its three-digit FICO score.
“New credit” makes up about 10 percent of a consumer’s FICO score, which falls in the range of 300-850. So, what does that mean to you, the consumer? Let’s start by looking at how “new” credit is defined. Let’s say you’re in the market for a car loan. When you shop around for credit, inquiries remain on your credit report for two years, although FICO scores only reflect those from the last 12 months. So, keep this in mind as you plan for major upcoming expenses and how you might finance them.
While it’s always good to do your research to find a competitive rate, there is such a thing as too much of a good thing. You don’t want to go overboard with inquiries. The same can be said of opening up new lines of credit in a short period of time. This can be a detriment to one’s financial health, especially those who don’t have an established credit history.
Credit Report vs. Credit Score
That said, here are a few other things to keep in mind as you explore your options. For one, understand the difference between your credit report and your credit score. You can request a copy of the former annually for free from one of the three credit bureaus. It’s a good idea to monitor yours regularly, so you can spot any fraud or mistakes and report them.
Second, when you’re reviewing your report, take note of the number of new accounts on your record and the time period in which they were opened. Lenders look at this data when making lending decisions. You should know that new accounts will lower your average account age, something people with a limited credit history should take to heart. However, those with established credit histories need to be careful, too, as opening a new account can still lower your credit score.
Third, take time to educate yourself on how inquiries work. While consumers shouldn’t apply for loans carelessly, it’s important to note they usually have minimal impact on credit score. Some are entirely ignored by lenders, and they take into consideration “rate shopping.” Typically, these are treated as a single inquiry and will have little impact on the credit score.
Last, be aware that FICO has some changes coming down the pike this summer that could affect consumers. The company announced it would offer a scoring model with two components, FICO 10 and FICO 10, to credit bureaus. The bottom line? The FICO Score 10 Suite could help or hinder consumers’ credit scores. Stay tuned for more information on these changes. In the meantime, check out this article that explains how first-time homebuyers might be impacted. Also, know that you don’t have to go it alone when trying to make sense of credit. Speak with mortgage professionals like mortgage lenders or real estate agents, and they can help you understand all of the nuances.