Credit Report Q&A

Is there a best way to go about applying for new credit to minimize the effect to my FICO score?

First off, don't sweat this too much; applying for new credit only accounts for about 10% of your FICO score, so the impact is relatively modest. Exactly how much applying for new credit affects you depends on your overall credit profile and what else is already on your credit report. For example, applying for new credit can have a greater impact on your FICO score if you only have a few accounts or a short credit history.

That said, there are definitely a few things to be aware of depending on the type of credit you are applying for. When you apply for credit, a credit check or "inquiry" can be requested to check your credit standing. Let's take a look at the common inquiries you might find on your credit report.

Credit Cards

When it comes to credit cards, always ask yourself "Why am I getting this card?". If your answer is need-based, such as needing credit for increasing expenses or wanting a lower interest rate to reduce monthly payments, then these may be perfectly legitimate reasons to open a new card. However, if you want a new card because it has a pretty logo or it's from your alma mater, then you might want to think twice. We recommend you only apply for new credit cards that you really need. When deciding if you need an additional card, it's also important to be aware of what's called credit utilization.

After asking yourself "why you need more credit", then ask yourself "How much more credit do I need?" If you only need a small amount to pay additional bills for a few months, try contacting your existing credit card companies to get your credit limits raised first. Why is this a better option? While a request for an increased limit may count as an inquiry just like opening a new card would, it won't reduce the average age of your credit accounts, which is also important for your FICO score.

If getting the limit raised on an existing card isn't an option, then try to apply for the fewest number of credit cards so that the combined credit limit meets your needs. If you think you need an extra $5,000, try to get one card with a $5,000 limit rather than two cards each with a $2,500 limit. When applying for new credit cards, each application is counted separately as an individual inquiry on your credit report, and the more inquiries you have, the more that could hurt your FICO score. Historically, people with six inquiries or more on their credit reports are eight times more likely to declare bankruptcy than people with no inquiries on their reports. So having more inquires makes you look more risky to potential lenders.

Home & Auto Loans

Rate shopping for a home or car is a smart practice, so your FICO score won't penalize you for doing this. You might even want to check out what rates you can expect ahead of time based on your FICO score using our free calculator. As you're rate shopping, multiple lenders may request your credit report to check your credit. We're aware this goes on, so your FICO score doesn't even consider any mortgage or auto inquiries made in the 30 days prior to calculating the score. So, do your homework ahead of time, decide on the companies to get quotes from, and try to do all the rate shopping and get the loan within 30 days. Not only will the rates be easier to compare when the quotes are closer together, but it will have no immediate impact to your FICO score.

Given rate shopping for home and auto loans has no immediate impact, why do you even see an inquiry on your credit report? While home and auto loan inquiries may appear on your report, after the initial 30 days your FICO score counts all those inquiries that fall in a typical shopping period as just one inquiry. So try to do your rate shopping within a matter of weeks as opposed to a matter of months to limit the longer-term impact as well.

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