How Does Getting Approved Affect Your Credit Score?
Explore how credit approvals shape your credit score, from the moment you apply to responsible account management.
A credit score is a numerical representation of an individual’s creditworthiness, based on information in their credit report. This report details credit history, including payment behaviors and current accounts. Various financial actions and decisions can influence these scores, reflecting how an individual manages their financial obligations.
Credit Inquiries from Applications
Applying for new credit can influence a credit score. When an individual seeks new credit, such as a loan or credit card, lenders perform a “hard inquiry” on their credit report. This occurs when a lender checks a credit report for a lending decision, usually requiring authorization.
A hard inquiry can result in a small, temporary decrease in a credit score. While these inquiries remain on a credit report for up to two years, their impact diminishes after about one year. Applying for multiple new accounts within a short timeframe can lead to a more significant negative effect. In contrast, “soft inquiries,” such as checking one’s own credit score or pre-qualifying for an offer, do not affect credit scores.
Reporting of New Accounts
Once a credit application is approved, the new account is reported to major credit bureaus. For revolving accounts (e.g., credit cards), the new account increases the total available credit limit. If balances remain low, the credit utilization ratio improves, which can positively influence the score. It is often suggested to keep this ratio below 30%.
A new account also affects the average age of credit accounts. Since new accounts are “young,” they can slightly decrease the average age of accounts, potentially causing a minor, temporary dip. This impact can be more pronounced for individuals with a shorter overall credit history. Adding a new type of credit, such as an installment loan, diversifies the credit mix. While credit mix is a smaller component of the credit score (around 10% of a FICO score), a diverse portfolio is generally viewed favorably over time.
Managing Approved Credit
Ongoing management of an approved credit account significantly shapes its long-term impact. Consistent, on-time payments are the most influential factor, accounting for approximately 35% of a FICO score. Making payments by the due date builds a positive payment history, crucial for improving and maintaining strong credit scores. Conversely, a single late payment exceeding 30 days can substantially lower a score and remain on a credit report for up to seven years.
Maintaining low balances on revolving credit accounts is important for responsible credit management. Keeping the credit utilization ratio low, ideally below 30% of the total available credit, signals responsible debt management. Lower utilization rates are associated with higher credit scores.
While acquiring new credit can be beneficial, applying for too many new accounts within a short period can be detrimental. Excessive applications lead to multiple hard inquiries and many newly opened accounts, which credit scoring models may interpret as heightened financial risk. Strategic and infrequent applications for credit, combined with diligent account management, help ensure approved credit positively contributes to one’s financial standing.