A new credit card can ding your score

This post comes from Jim Wang at partner blog Bargaineering.

We recently purchased a Fujitsu ScanSnap S300 and have been scanning a lot of our documents to reduce the number of paper documents we retain. Among the documents we came upon were two printouts of my wife’s FICO credit score and credit reports from Equifax, through myFICO. Earlier this year she signed up for the trial to see what her score was and in between the two inquiries she applied for a credit card.

• 10 questions to estimate your credit score

The first report was pulled in mid-March and she had a glowing score of 804. The second report was pulled a month later and her score was 790, still very strong.

The only difference? She applied for and was approved for a new credit card. It cost her 14 FICO points.

MyFICO report and score

The first part of myFICO’s report will list the good, the bad, and the ugly parts of your report in summary format. Items that are hurting your score or helping your score are highlighted, giving you a good indication of what you might want to do (or avoid) to improve your score.

In the first report, there were no red (bad) items -- not surprising with a score of 804. In the second report, there was only one -- her score was hurt by the hard inquiry for the credit card and a fairly new line of credit with the approved credit card.

Fourteen points aren’t a lot when you start at 804 but, as myFICO’s credit score tables indicate, it could make a difference if you’re at the range boundaries. If you have a score of 765 and are looking for a new home loan or a refinance, 14 points are huge.

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I would argue that you should not apply for credit for a full year before you plan on getting a loan and certainly avoid inquiries and new accounts within six months.

What’s affected?

When a new line of credit is added, it affects a bunch of the metrics that factor into your credit score:

• Hard inquiry. When a lender pulls your credit to make a lending decision, it’s called a hard inquiry and that negatively affects your score. When you apply for a credit card, the company will initiate a hard inquiry.
• Average account age. Your new credit card will have an age of 0 years, 0 months, which will lower the average age of your accounts and negatively affect your score.
• Credit utilization. This is the percentage of your total credit that you are currently using; the lower this is the better. When you add a new account, you will increase the total credit you have and lower the percentage you are using (assuming you don’t immediately charge to the card).

Many factors go into your score, so if you were to apply for a new account, you probably wouldn’t get dinged exactly 14 points. But I suspect it will likely be in that general area. I wouldn’t expect a fall of 100 points.

If you have personal data like this, please share in the comments. I’m curious to know if this order of magnitude is in fact correct or if we’re simply drawing too many conclusions from a data set of one.

Related reading at Bargaineering:

• How to get a free FICO credit score
• Opt out of credit card internal marketing
• Review your state’s gift card rules