How Will a New Credit Line Impact my Credit Score?
When applying for a new line of credit, it’s natural to fret a little — or a lot — about how this move will impact your credit score. However, it can still be a smart move!
Your credit score is meant to be used (within reason)
The entire point of building a healthy credit history and a strong credit score is that it’s there to be used when needed. Sure, we’d rather be able to go through life just buying everything outright in cash and never dealing with debt — but a credit history can also be checked by potential landlords, employers, and even insurance companies. Alright, I’m digressing a bit from the point. The point is that you should be leveraging your strong credit score to get a better deal. While it’s great to aim to be in the 800+ credit score club, it’s also smart to view your credit score not as a trophy but as an insurance policy that gets used when necessary.
What happens when you apply for a new line of credit
Personal loans offer something credit cards often don’t: the ability to shop around. It starts by getting pre-approved before applying. The lender does a “soft pull” of your credit report, which doesn’t harm your score. Now, when you actually take out a loan, that’s when you might see a ding.
Typically, when you get a new line of credit it will ding your credit score a handful of points (often in the 10 points range, maybe as much as 20). For context, missing a payment or having a bill go to collections can cost you as much as 100 points!
If this move can save you hundreds to thousands of dollars, it’s really not worth stressing over a handful of points on your credit score, especially since it won’t take long to bounce back.
How and why you’ll rebound quickly
First, you’ll be making all your payments on time, which is 35% of your credit score – the largest single factor. Second, if you consolidate your credit card debt with a personal loan and pay off all your credit cards, it automatically brings down your utilization (30% of your score) — which helps improve your score.
Both of those will help boost your credit score, which helps you rebound from that initial point drop quickly.
You can shop around for a personal loan!
When you’re looking to get a personal loan, it is a-okay to shop around! In fact, you should apply for a few different options to see which one gives you the best rate. As long as you do this within a maximum 30-day window (ideally a 14-day window), then the credit bureaus see that you’re simply shopping around and you won’t get dinged for each individual application but generally just for the one you take.
In fact, each time you apply for a credit card it, you’ll see a dip in your score (unless it’s a “pre-approval” and not an actual application).
The one time this is a bad idea
There’s one situation in which you want to go on lockdown mode when it comes to your credit: six to nine months before you buy a house. You want your credit score to be as strong as possible to help you get a top-notch mortgage rate.