COMPONENT 5 –
NEW CREDIT AND INQUIRIES
10% OF YOUR CREDIT SCORE

Keep in mind that lenders do not know you personally, so they use your credit report and your credit score to gauge your financial character and whether they want to give you credit or not. Your credit score consists of five different components. The financial steps you take can hurt or help your scores and sometimes can hurt you in one component and help you in another. The one explained here with tips on how to improve your credit score is New Credit and Inquiries, which makes up 10% of your Credit Score. This component reviews the number of times you have tried to get credit and the number of times others have reviewed your credit score. 

Although this component is only 10% of your credit score, it is easy to lower your credit score if you ignore the impact of new inquiries. There are two types of credit inquiries: soft inquiries and hard inquires (sometimes referred to as a soft pull or a hard pull). When you check your own credit such as when you pull your annual credit report, this is a soft inquiry and does not impact your credit score. When you apply for credit, the lender will check your credit and this counts as a hard inquiry resulting in your credit score going down. Lenders review the number of hard credit inquires you have done to see if you are responsibly taking on new credit or excessively taking on a lot of credit and debt.

Credit inquiries stay on your credit report for two years. Different credit score models calculate your score differently, but they typically follow a model such as the one below.

Impact of Inquiries in the Past Two Years:

0 = Excellent
1 – 2 = Good
3 or more = Can be Considered Bad and Lower Credit Score

STEPS TO IMPROVE YOUR CREDIT SCORE REGARDING NEW CREDIT AND INQUIRES

– When looking for a new installment loan, rate shop within the allowed time frame. 

If you have multiple credit inquires within a certain time frame, 14-45 days depending on the type of loan, credit bureaus count these together as one inquiry and it only impacts your credit score once. For example, if you are looking for a new car and you go to two banks and three car dealerships to shop around for the best rate for a loan in a 14-day period, all of this will count as one inquiry. You should consult your bank or loan office to find out what the time frame for the type of loan you are looking for is so that you can plan ahead and preemptively build the schedule to shop around.

– Avoid closing your older accounts. 

Each new account you open lowers the average of your total accounts. Your older accounts will help keep the average higher so, if possible, avoid closing these accounts. 

– Consider how your new credit will impact your credit utilization. 

If the new credit account you open increases your credit utilization, this will lower your score in this category and amounts owed. For example, opening a mortgage would lower your credit score as a new inquiry and for using more credit than you were before.

However, new credit can also lower your credit utilization. For example, if you currently have one credit card with a $5,000 limit with a $2,000 balance, you have $3,000 available (40% usage). If you open a new credit card with a limit of $10,000 and only use $2,000 of that card as well, this could increase your score in terms of credit utilization as you now are using $4,000 of your $15,000 available credit (27% usage.) Note that this would also improve your credit score because your credit card utilization is under 30% now. If this is also a new type of credit such as taking on a mortgage when you have previously only rented, this will improve your credit score due to the credit mix component. Do be careful that having access to more credit does directly increase the chance for you to taking on more debt. The more accounts you have, the more vigilant you will need to be in managing your debt.

– Open one or fewer new credit accounts a year.   

This is a rule you can follow to ensure that you do not open more than two accounts in a two-year period as any more will lead to a lower credit score in this category. For example, if you are someone who pays off their credit card entirely and utilizes them for rewards, you may want to limit yourself to opening no more than one new credit card a year. 

Other Credit Components