What Does It Take to Have Good Credit? Part 4

This is a 5 Part Series explaining the basics of good credit.

The fourth factor in determining your credit score is the number of new credit inquiries made on your behalf. Anytime you allow a potential creditor to access your credit report, the credit reporting agency will treat this as an inquiry. Your score is lowered with each inquiry because an inquiry means you’re looking to open a new credit account and a new account can lead to more debt. So, it’s not a good idea to walk through the mall and apply for new credit at retail stores just to get a 10% discount.

What’s the best way to manage this factor of your credit score? Knowing how it works can help you make better decisions. For example:

• Don’t open new credit card accounts if you plan on getting a car loan or mortgage in the near future. Applying for new credit cards could lower your credit score just enough to prevent you from getting good rates or even the loan itself.
• Don’t open new credit card accounts just to get the discount. No matter how tempting it seems, that 10% discount for opening a new credit card account at a retail store really isn’t worth it. First, a retail credit account has limited value for your overall credit needs. Second, you’ll probably end up spending more than you can pay off right away which means you’ll lose the 10% discount when you pay the 15% or more interest rate on your purchase.
• Don’t open new credit accounts unless you really need them. There are some good reasons to open new credit accounts, just be sure you can pay the credit card off in full each month. Some reasons to open a new credit account might be to:
  • Establish credit
  • Pay for reimbursable business or travel expenses (better than using your checking account where you could risk an overdraft)
  • For fraud and personal identity protection on your purchases – some credit card companies offer consumer protection you wouldn’t have if you used cash.

Anytime you allow an inquiry on your credit report, your credit score will go down by a couple of points for a short period of time. The good news is that it’s temporary. If you’ve just opened new credit card accounts, you might want to wait a few months before you shop for that car loan. However, if you make a habit of applying for new credit, you will continuously lower your score. It’s much better to pick a few reliable credit cards and stick with them than to continuously open new accounts.

Next week we’ll talk about secured credit versus unsecured credit – watch for it in your inbox.

Jill Russo Foster is the author of Cash, Credit, and Your Finances: The Teen Years. She provides practical tips for every day finances. Learn more about protecting your credit and living within your means, with Jill’s popular free reports and bi-monthly ezine, available here ==> CashCreditandYourFinances.com