Lots of Brand-New Credit
Brand-new credit can be useful, but dangerous. When you're increasing your credit capacity (that is, the amount of credit available to you), you should pace yourself. Opening up too many new accounts in a short period of time will hurt your credit score. New credit is especially important if you have a limited credit history, or if you're recovering from previous financial problems. If you're a seasoned borrower with a clean record, new credit is less damaging. Nevertheless, you need to know which pitfalls to avoid.
Length of Credit History
The length of your credit history accounts for 15 percent of your FICO credit score. This piece of the pie looks at how long you've had credit in general, and specifically how long you've had a given account. If you open too many new accounts in a short period of time, you lower your average account age. Since a higher average account age is better than a lower one, you lower your credit score. If you need more credit capacity and intend to use it wisely, consider asking your existing lenders to increase your credit limit. You'll avoid inquiries and new accounts.
New Credit
New credit accounts for 10 percent of your FICO credit score. New credit refers to the number and type of accounts that you've recently opened. In addition, this part of the scoring model looks at your inquiries: how many you have had in the last two years, and what type of inquiries they were. As you might imagine, a high frequency of unsecured credit inquiries is bad.
According to Fair Isaac, borrowers with six or more hard inquiries in their files are eight times more likely to file for bankruptcy than those who don't have any inquiries. Of course, a borrower deemed a higher bankruptcy risk will pay higher interest rates — if she can even get a loan.
As with managing your average account age, consider asking your existing lenders for a credit-limit increase. By doing so, you can avoid new credit altogether.
Take 10 Percent Off What?
A lot of people damage their credit around the winter holidays. While shopping for gifts at a department store, it's not uncommon to be offered a 10 percent discount for opening a credit account with the store. This is an attractive deal — 10 percent off of $250 is $25. If you do this at several retailers, you can save a bundle.
The deal gets much less attractive when you look at the damage to your credit score. Every hard inquiry takes a few points off of your credit score, and multiple inquiries in rapid succession can be a sign of credit trouble. Remember, these are not mortgage or auto-loan inquiries, these are inquiries for unsecured revolving credit. You don't get a fourteen-day window with that type of inquiry.
Creditors want to lend money to seasoned veterans. They feel safer about giving you money if they can be confident that you'll follow the terms of your agreement and repay according to those terms. If you've got a good history, don't close those accounts and let them fall off of your credit report.
In addition to the inquiries, you open several new accounts rapidly. Also, you now have more credit capacity that you can use to get yourself in trouble. Before you take one of these offers, consider your credit. Saving a few dollars is nice. However, you might end up with higher interest rates on bigger loans and see those savings more than disappear.
