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New Credit Won't Permanently Tank Scores

 
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June 6, 2013
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QDear Erica,

I just opened two credit cards within a month. I know my credit score is going to take a hit. The length of my credit history is three-and-a-half years with my four original credit cards. How long will it take to get my score back up? It dropped 22 points when I opened one new card, and with the AmEx card, I know it's going to drop some more. — Eric

AHi Eric,

I insist that you stop fretting about your credit scores. With a couple new cards on top of several other existing ones, I have a feeling they're more than adequate.Ask Erica

However, it also seems to me that you could use a bit more information about how such scores work and what they mean to lenders. Once you know, I'm sure you'll relax and focus on what's really important — the way you manage those six separate credit lines.

As for the scores, I presume you're referring to your FICO score, the most common score in use today. FICO scores take the financial information on your consumer credit reports, plug it into a mathematical model and transform it all into a number that a business can use to assess risk. Banks, credit unions, landlords and insurance companies all rely on FICO scores to make objective financial decisions.

FICO scores range from 300 to 850, and the higher the digits are, the less risk a lender assumes when allowing you to borrow money. Of course they'll look at other factors as well, such as income and assets, but that's another topic.

I understand that you're concerned about the impact that opening accounts can have on your FICO score, but I assure you it is minimal. Scoring categories are weighted by five factors. Here's the breakdown:

Payment history: 35 percent

Amounts owed: 30 percent

Length of credit history: 15 percent

Types of credit used: 10 percent

New credit: 10 percent

Even a quick glance at this list should be enough to convince you that what's most vital is the way you pay. Send at least the minimum the creditor asks for on time, every time and you're satisfying that first crucial category. If you also keep your debt low (compared to your overall credit limit) or at zero, you've got the majority of the FICO score covered.

Regarding your limited credit history, don't worry about that either. Nearly four years of borrowing and repaying is enough to generate a strong score. Because you have both credit cards and a charge card, you have at least two types of accounts in action, which is great. If you have a car loan or a mortgage in the mix, even better.

And the new credit issue? The accounts you've just applied for (and for which you've been approved) may be dropping your scores, but again, it's a tiny part of the way FICO scores are calculated. In a month or two, your score should bounce back from whatever dip it experienced from the initial inquiry. All you need to do now is use your cards and submit your payments in full and by the due date.

Finally, you may want to pull back on getting more credit. You've already got some serious charging power in your pocket.

Got a question for Erica? Send her an email.


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