December marked the spark of thousands of new store credit cards opening up in addition to Bank Credit Cards as all types of temporary incentives were given to woo consumers – from 10% off; 0% interest to cash back rewards. Did you fall victim to this as well?
It's often said that you should not open credit accounts unless you need them; don't do it just to build a credit score.
I disagree with that. You can't get the credit accounts you ‘need' if you fail to open up credit accounts for the sole purpose of just building credit. Can you buy a house without some form of credit already established? A car? At what interest rate/terms? I DO agree that you should not open credit unless you need it and that includes building credit. I DO agree that you should not open new credit just to get a discount.
However…. before you open up that new credit account, weigh the benefits/consequences:
10% of your score is based on New Credit – that's mostly negatively, not positive. FICO weighs:
- How many new accounts you've opened in the past 6-12mths;
- How many new accounts of the same type you have opened (so if you have too many new credit card accounts, for example, this can be viewed negatively);
- How many inquiries you've had in the past 12mths; and how long it's been since you've opened up any new accounts.
- Payments made on an account bringing it out of a negative status to positive (This positively impacts this section of your score)
So, when you apply for a new credit account; the first thing that happens is a hard inquiry – that's negative. If approved, you'll have a new account on your report that will affect the first bullet above, New accounts opened in the past 6-12 months – that's negative. If you already have too many accounts of the same type – that's a negative. Another negative is something called the Average Age of Accounts; this is apart of the 15% calculation of your score called Length of Credit History. One of the major things it takes into consideration is the average of older accounts and newer accounts; so if you have a pretty long history; when new accounts are opened the Age of your Accounts are shortened.
So, what's positive about opening new credit?
Well, your Debt Utilization is increased. Debt utilization is apart of the Amount Owed section of your score, which makes up 30% of your score. When you have more available credit than you have used (amount you have spent) credit; that is a positive. Just looking at the percentages, 30% is much higher than 10%, right? So, obviously if you can benefit from having more available credit, then it's worth the temporary ding in your credit score. To add; once you start paying on time over the next 6-12 months you'll see a sizable boost in the Payment History section of your score as well; which makes up 35% of your overall score.
Therefore, if you open up new credit the negative impact will be short lived as you keep your balances low and pay on time over the next 6-12 months. If, however, you open a new account and spend over 30% of the available credit and make late payments; your score will tank significantly. Credit is based primarily on our habits – 65% of our score takes into consideration our paying habits and how much we owe nn our credit; revolving accounts (credit cards) in particular.
Hope this helps!