New Credit - FICO® Scores
- Does a FICO® Score alone determine whether I get credit?
- What is a typical FICO® Score for someone new to credit?
- How is a credit history established?
- What is a credit “inquiry”?
- Will my FICO® Scores drop if I apply for new credit?
- How can I minimize the effect to my FICO® Score when seeking new credit?
No. Most lenders use several factors to make credit decisions, including a FICO® Score. Lenders may look at information such as the amount of debt you can reasonably handle given your income, your employment history, and your credit history. Based on their review of this information, as well as their specific underwriting policies, lenders may extend credit to you even with a low FICO® Score, or decline your request for credit even with a high FICO® Score.
FICO® Scores are generated by complex mathematical algorithms based on unique credit report data, so there is no “typical” or “entry-level” score. While someone new to credit may have difficulty scoring in the highest score ranges due to a limited number of active accounts and length of history, it is possible to have a FICO® Score that meets lenders’ criteria for granting credit. FICO® Scores consider the extent to which people can demonstrate a good track record of making payments on time. In fact, payment history is more important for FICO® Scores (about 35%) than length of credit history (about 15%).
There are a few ways to establish a credit history, including the following.
- By applying for and opening a new credit card, a person with no or little credit history may not get very good terms on this credit card—such as a high annual percentage rate (APR). However, by charging small amounts and paying off the balance each month, you won’t be paying interest each month so the high APR won’t hurt your financial position.
- Those unable to get approved for a traditional credit card may be able to open a secured credit card to build credit history, provided the card issuer reports secured cards to the consumer reporting agency. This type of card requires a deposit of money with the credit card company. Charges can then be made on the secured card, typically up to the amount deposited.
With both traditional and secured credit cards, keeping balances low, paying off balances each month, and not missing payments are important for responsible financial health management.
When you apply for credit, you authorize those lenders to ask or "inquire" for a copy of your credit report from a consumer reporting agency. When you later check your credit report, you may notice that their credit inquiries are listed. You may also see inquiries by businesses that you don't know. But the only inquiries that count toward your FICO® Scores are the ones that result from your applications for new credit.
Soft inquiry - Soft inquiries are all credit inquiries where your credit is NOT being reviewed by a prospective lender. FICO® Scores do not consider involuntary (soft) inquiries made by businesses with which you did not apply for credit, inquiries from employers, inquiries from lenders for account review purposes for which you already have a credit account, or your own requests to see your credit file.
Hard inquiry - Hard inquiries include credit checks when you’ve applied for an auto loan, mortgage, credit card or other types of loans. Each of these types of credit checks count as a single inquiry. One exception occurs when you are “rate shopping”. Your FICO® Scores consider all hard inquiries within a reasonable shopping period for an auto, student loan or mortgage as a single inquiry.
If so, they probably won’t drop much. If you apply for a credit account, a request for your credit report information (called a “hard inquiry”) will appear on your report. Looking for new credit can indicate higher risk to a lender, but multiple inquiries from auto, mortgage or student loan lenders within a short period of time are treated as a single inquiry rather than multiple inquiries and tend to have little effect on your FICO® Scores.
Applying for new credit only accounts for about 10% of a FICO® Score, so the affect is relatively modest. Exactly how much applying for new credit affects your score depends on your overall credit profile and what else is already in your credit reports. For example, applying for new credit can have a greater effect on your FICO® Scores 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 look at the common inquiries you might find in your credit reports.
Credit Cards - If you only need a small amount, credit card companies will sometimes provide an increased credit limit (for accounts already opened). 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 to your FICO® Scores.
If getting the limit raised on an existing card isn’t an option, then applying for the fewest number of credit cards will have the least negative affect to your FICO® Scores. For example, if a person needed an extra $5,000, getting one card with a $5,000 has less effect on your score than getting two cards each with $2,500 limits. That’s because when applying for new credit cards, each application is counted separately as an individual inquiry in your credit file, and the more inquiries you have, the more that could hurt your FICO® Scores. Having more inquiries makes you look riskier to potential lenders.
Home, Auto, and Student Loans - FICO® Scores do not penalize people for rate shopping for a home, car or student loan. During rate shopping, multiple lenders may request your credit reports to check your credit. But FICO® Scores de-duplicate these and consider inquiries within a reasonable shopping period for an auto, student loan or mortgage each as a single inquiry. Doing the entire rate shopping and getting the loan within 45 days, will have no immediate effect to your FICO® Score.
Given rate shopping for home, auto and student loans has no immediate effect, why do you even see an inquiry in your credit files? While these types of inquiries may appear in your files, FICO® Scores count all those inquiries that fall in a typical shopping period as just one inquiry. So, again, doing rate shopping within a matter of weeks as opposed to a matter of months limits the longer-term affect to your scores as well.
FICO is a registered trademark of Fair Isaac Corporation in the United States and other countries.
Redwood Credit Union and Fair Isaac are not credit repair organizations as defined under federal or state law, including the Credit Repair Organizations Act. Redwood Credit Union and Fair Isaac do not provide "credit repair" services or advice or assistance regarding "rebuilding" or "improving" your credit record, credit history or credit rating.
FICO® Score and associated educational content are provided solely for your own non-commercial personal review, use and benefit.