Welcome to Part 5 of a series on how to raise credit scores from good to great. This isn't something that happens quickly, but with time and a few savvy strategies, you'll make it over the hump.
Here's a quick reminder of the factors that go into your FICO score, along with their respective weights:
- Payment History (35 percent)
- Amount owed, which is the amount of credit you've used (30 percent)
- Length of credit history (15 percent)
- Types of credit used (10 percent)
- New credit (10 percent)
In Part 4, we talked about the length of credit history and how to give that factor an extra oomph. Now we're going to take an indepth look at "new credit" and how to manage that for maximum points. New credit only accounts for 10 percent of your score, but every little bit helps.
What's Meant by "New Credit?"
The term is actually a little misleading because you can lose points off your credit score even if you get denied and there's no "new credit" involved. When you apply for credit, the lender will view your credit report and request a credit score, which will most likely be a version of the FICO score.
The items included in your credit report are used by the score algorithm to calculate your score. Each time you apply for credit, this is what's called an "inquiry." Each inquiry takes off anywhere from zero to five points from your score, depending on the specifics of your credit history. So keep this in mind when you apply for any type of credit, such as a credit card, mortgage or auto loan.
How New Credit Impacts Credit History
Opening a lot of new cards in a short amount of time can affect your score in more ways than one. You get points knocked off for an "inquiry" for each credit application, obviously. But it can also affect another factor: The length of your credit history.
This is because new accounts can lower your "average age of accounts." The FICO score considers the average age of your accounts and you get more points for a longer history. If you need to open an account, then do so. But don't open accounts left and right just because you're after sign-up bonuses. And if you're fairly new to credit, the last thing you want to do is make the average age of your accounts even younger. Think of your credit history like a fine wine. The older, the better.
How to Boost Your Score in this Category
If you're rate shopping for, say, a mortgage, then do your applications close together. The FICO score recognizes that this type of inquiry is based on getting a better rate. So don't spread out your rate shopping or the score might count it as separate inquiries.
If you are applying for credit cards, then spread out the applications. This way, you won't get a big ding to your score at one time. If you apply for three cards, you could get anywhere from a couple of points to a whopping 15 points shaved off of your score. So think twice before you decide you simply have to have every new card with an awesome sign-bonus.
How to Gauge Your Progress
It's always fun to set a goal and then track your progress, but buying a FICO score every month can get expensive. You might want to get your FICO score when you start your campaign to attain an excellent FICO score, but once you're on your way, you can get a glimpse of your credit health for free.
Just use LendingTree's Free Credit Score and you'll get an idea of where you stand on the various factors that are used to calculate your credit score. Now, this free score represents your score based on VantageScore 3.0, not on a version of a FICO score. However, LendingTree's free score considers most of the same factors that are included in your FICO score. You'll get a grade on each factor, which tells you what you need to do to increase your credit score.