A lot of people are disappointed to find out that their credit score has gone down after opening up a new credit card. In some cases the credit score goes down twice, once directly after an application and then again sometime around a month or two later. This causes a lot of worry but it’s completely normal when this happens and it’s only temporary. Here’s what’s likely going on when this happens.
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How is a credit score determined?
To understand what’s happening, you first need to have a good grasp on how credit scores are determined. There are a number of different types of credit scores but the one most commonly used is the FICO model. Your FICO credit score is determined by the following categories:
In this instance, the biggest factor that will be negatively affected is the new credit category that makes up 10% of your score. New credit looks two major things affected here: recent inquiries and new accounts opened.
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When you apply for a line of credit, the lending institution will typically do a hard pull on your credit report. (I say “typically” because some banks such as American Express do not always conduct a hard pull on your credit report.)
For many, this hard pull results in about a 3 to 5 point drop in your score. But that is just the average drop you would typically expect.
For lower credit scores or for people with thin credit profiles this drop could be much higher (even over ten points). This is especially true if you have back to back inquiries within a matter of days or weeks.
For those with more established credit reports (or people with perfect credit scores) the drop could be negligible. I’ve even heard reports of people not seeing a drop at all in their credit score, though that seems to be pretty uncommon.
Most of the time, the drop in your credit score from a hard pull will be instant. In fact, I have even seen a hard inquiry notification show up before a credit card application is finished processing.
If you check your credit score right before and after you submit an online application for a credit card you will likely see that your score has already dropped. The good news is that the negative effect of these inquiries will diminish in roughly 60 to 90 days.
At that point your score should start to recover or already be completely recovered from the hard pulls. After 12 months, the hard pulls will no longer affect your FICO score and after 2 years the inquiries will disappear entirely from your credit report.
A lot of people are aware of the first drop caused by hard inquiries, but I still get emails from people who are concerned when their score inexplicably drops a second time, usually around a month later. There is often a simple explanation for this.
New accounts opened
In addition to hard pulls, new accounts will also often drop your score but it may not be instantly. this is because some banks take a few weeks (or even months) to report a new account to your credit report. For example, many times it takes approximately 45 to 60 days for an American Express account to appear on your credit report.
When that new account is reported, it brings down your credit score even more. Just how much it goes down depends on factors like your credit history and how many other recent accounts you’ve opened.
If you have a thin credit profile and you were to open more than one account at one time then you could see a pretty significant drop in your credit score that happens a month or so after your initial drop from the hard inquiries.
Some people feel the need to panic when this happens but they have to remember that their score will eventually go up as a little bit of time goes by.
A credit score will jump up even quicker if those new accounts also helped bring down that person’s credit card utilization and it’s possible that within 120 days you could see a score make a dramatic jump back up so that the credit score rises to a point much higher than it was before that first hard inquiry brought it down.
Sometimes there is not a clear explanation for why your credit score has dropped. It’s possible that after a new account appears on your credit report there is no change to your score or perhaps even your score goes up only to go down a month or two later.
In some cases you may just have to chalk up the change to complicated algorithms that are working in the background. But other times you might just need to look a little bit closer to find the culprit.
It is possible that applying for a new card and opening up a new account could affect other factors in your credit report (besides new accounts) that have an impact on your score. For example, your new account might be affecting your utilization in a negative way and you may not be realizing it.
If you still don’t know what is going on my recommendation would be to just wait 60 to 90 days to see what happens to your credit score. (Obviously, you also want to verify that there are no errors on your report that could potentially explain the drop in your score.)
Also, make sure that you are checking the same type of credit score and the same model. There are different types of FICO scores and it is possible that your score could drop if you are viewing an older or newer version.
If you’ve just opened up a credit card or two and you’ve seen your credit score take two different drops back to back, don’t worry — this is completely normal. Just wait it out for a couple of months and make sure you are responsibly using your credit cards and you will eventually see your score jump back up very soon.
Daniel Gillaspia is the Founder of UponArriving.com and the credit card app, WalletFlo. He is a former attorney turned travel expert covering destinations along with TSA, airline, and hotel policies. Since 2014, his content has been featured in publications such as National Geographic, Smithsonian Magazine, and CNBC. Read my bio.