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To Her Credit

New accounts should have only minor credit score impact

Summary

Something’s wrong if a new credit card and a new utility account cause a big credit score drop

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QuestionDear Sally,
I recently opened a Wal-Mart credit card and also a new account at AT&T. My credit score has drastically dropped. As far as my credit card goes, I make a payment every two weeks instead of monthly. Can you give me tips on how I can bring my score back up? – Trudi

Answer

Dear Trudi,
Something is wrong if you have seen a drastic drop in your score while keeping your payments current. What you describe should have had only a minor impact.

Let’s look at what should have happened to your credit with your new accounts. Typically, when you apply for a new credit card or service that requires a credit check, your credit score takes a small, temporary hit due to the hard pull of your credit report to determine if you qualify for the card or service. You probably expect credit card issuers to check your

creditworthiness, but many people don’t realize that a new cellphone account comes with a credit check, too.

So you took a bit of a credit score hit with these two new accounts – probably no more than five points each. As time marches on, the impact fades. Credit report hard pulls disappear in two years from your credit report.

What also may have contributed to a score drop is that whenever you apply for new credit, your “length of credit history” is shortened, which accounts for 15 percent of your FICO score. By opening the new card, you effectively shortened the overall age of all of your accounts. To understand this credit scoring quirk better, read “How average credit account age affects your credit score.” How much of an impact it has will depend on how much other credit you have. If your credit history is short, and you have few other accounts, the impact will be greater.

But even with those two factors combined, it should have been a minor impact, not a dramatic one.

That leaves a puzzle that needs solving. If you’re not late with your payments and you keep your credit utilization low, something else is causing the drastic drop. You need to find out what it is. Pull your credit reports from annualcreditreport.com. By federal law, credit bureaus must provide consumers with a free report once a year, and that site gets you the reports from each of the three big credit bureaus.

Closely examine your credit reports. There could be errors, or someone could be fraudulently opening accounts in your name. Also pull your credit score. Like many other cards, Wal-Mart gives you a free FICO score as a benefit. Along with your score will come an analysis showing why your score is the way it is. By pulling your credit reports and scores, you should have a clear picture of what went wrong.

Once you figure out what has gone awry and correct it, the important thing for your credit score is how you handle the credit going forward. If you miss payments on your new card, any resulting negative marks can cause your credit score to plummet. While getting the card can cause a dip of a few points, a 30-day late payment on that new card can knock as much as 100 points off a formerly excellent score.

Don’t forget, though, that your new card should eventually start making a positive impact on your credit score. It does that by increasing your debt-to-available credit ratio, also known as the credit utilization ratio. Because you have more credit available now, and if you keep the balances low on this card and across all your cards, your scores should improve. However, if you max out any card, even if you never miss a payment, your score will generally go down.

You already have a good habit that will serve you well: You make payments every two weeks That knocks any balances down before the lenders have a chance to report them to the credit bureaus, keeping your credit utilization low and boosting your score. You may be able to refine your process further, and find out from the card issuer when they report to the credit bureaus and time your payments so there is zero chance of a balance being reported.

The final, most important key is this: Be almost fanatical about paying your bills before they are due every month. I pay a minimum amount automatically from my bank’s online bill payment system, and then I pay the remaining balances off every month. That way, even if I go on vacation or just slip up and pay the remaining balance after the due date, I never have a late payment or have to pay a late fee.

Your new card account should actually help increase your score in the long run, as it helps you build a solid credit mix and history. Find out what’s wrong with your credit, fix it, and then follow the above steps to get back on track toward an improving credit score.

See related:FICO’s 5 factors: The components of a credit score

 

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