How a new credit card can affect your credit score

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DjelicS/Getty Images

DjelicS/Getty Images

Opening a new credit card can cause your credit score to dip a bit.

Yet, my score increased 16 points after I applied for a new credit card last month. I have a theory for why that might be.

Mind you, I can’t prove this theory. Credit scores can change from one month to the next for a variety of reasons. And a fairly big swing isn’t unheard of.

In fact, Fair Isaac Corp. — creator of the popular FICO score — says 88 percent of consumers see their credit scores change by up to 20 points each month.

In my case, a key measure that helps determine my credit score shifted after my new card arrived. More on that later.

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Shopping for credit

There are five factors that contribute to your credit score. I’m going to start first with the one that can cause your score to dip when you get new credit.

Shopping for and receiving new credit, be it a credit card or a mortgage, makes up 10 percent of your credit score. Opening multiple accounts over a short period of time could have a negative impact on your score.

“Research shows that opening several credit accounts in a short period of time represents a greater risk — especially for people who don’t have a long credit history,” FICO advises on its website.

But if you’re applying for just one new credit account, your score “probably won’t drop much,” FICO says.

My credit score dipped around the time I applied for my new credit card, but I don’t think this factor is the reason for the decline.

Your credit history matters

Two other factors that can cause minor fluctuations in your credit score are your credit mix (10 percent) — lenders like to see you can responsibly handle different types of credit — and the length of your credit history (15 percent).

I’m in pretty good shape on both of these factors.

Factors that impact your score the most

The two biggest factors in your credit score are payment history (35 percent) and the amounts you owe (30 percent).

Your payment history will show whether you’ve paid your credit cards, personal loans and your mortgage on time. It also includes any bankruptcies, foreclosures and judgments against you.

Here’s the golden rule of credit scores: Always pay your bills on time.

“A few late payments are not an automatic ‘score-killer,'” FICO advises. “An overall good credit picture can outweigh one or two instances of late credit card payments.”

Finally, what you owe can be a big deal when it comes to your score, because using a “high percentage” of your available credit “can indicate that a person is overextended, and is more likely to make late or missed payments,” according to FICO.

This factor takes into account your credit utilization — how much of that available credit you are using. The more you use, the worse it is for the credit score.

Credit utilization is, I believe, what caused my score to drop — and to increase.

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For most of the past six months, I’ve used between 5 and 8 percent of my available credit. This doesn’t mean I’m carrying a balance. Even if you pay your cards in full each month, the scoring models may capture your balance before you’ve paid it off.

But in December, my utilization jumped to 10 percent, which is still very good. I think, however, it was enough of a bump to cause my credit score to fall to its lowest point in half a year.

That utilization fell in January when I received my new card — and the additional credit line that came with it.

If you don’t want to get a new credit card, you can still benefit from a higher credit score if you ask your issuer to increase your credit limit. Give it a try. It usually works.

It’s more than the score

All that being said, we tend to obsess too much about our three-digit credit score. It’s not the score that’s important; the behaviors that make that score are what’s key.

Moving from a 793 to an 809 will have no impact on whether I’ll get approved for a loan or what interest rate I’ll be offered.

But I can get hurt if I don’t understand why charging $3,000 on a credit card with a $4,000 limit might be a bad idea.

Barrett Burns, the president and CEO of VantageScore Solutions, a FICO competitor, summed it nicely in a recent Linkedin post:

Our message for consumers is that you’re more than just a score. It is bigger than that. Concentrate on your credit health. This means making positive credit decisions such as paying bills on time, managing your credit cards wisely and not applying for unnecessary loans. Take advantage of your right to check your credit reports for free every 12 months at www.AnnualCreditReport.com. If you do these things, your credit scores will improve and stay high regardless of the model used to calculate the score.

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