The Credit Challenge

I recently had someone ask the question, if you take out a new car loan, will your score drop?  That is a great question, and I’m sure you may be wondering this as well.

Here’s what I told him;

“There are a few factors to consider regarding your question.  The simple answer is that your score may drop within the first 45-60 days because it is a new account without any history yet until the first payment gets reported.

Now, the other factor that comes into play is the average age of your credit.  When you open a new account, you immediately give your credit a “younger age,” meaning the credit length becomes more shallow.

Here’s what I mean.

Lets say that you have the following accounts established:
Credit Card 1 - 5 years
Credit Card 2 - 6 years
Mortgage - 4 years
Home Equity Loan - 5 years

Well, the age of your credit is 5 (20 total years divided by 4 accounts) years of established credit, which is the average length of time that you’ve had these accounts.

On the other hand, lets throw in a new account.  Your age drops instantly to 4.2 years.  The more newer accounts that you have, the shorter your credit age is, which can reduce your credit score.

If you have plenty of long term credit history, then it really doesn’t make much of a difference. However, if you don’t, your score may drop considerably.”

Always keep this in mind when going for new credit.  Ask yourself “How many other accounts do I have?”  Will this new loan lower my score?”

Chances are, you may choose to hold off on the new loan and maintain your credit.