Utilization, length of credit history and new accounts are hit by the new card
Barry Paperno is a freelance writer and credit scoring expert with decades of consumer credit industry experience, serving as consumer affairs manager for FICO and consumer operations manager for Experian. He writes “Speaking of Credit,” a weekly reader Q&A column about credit scoring and rebuilding credit, for CreditCards.com. His writings about credit scoring have appeared on Huffington Post, MSN Money, CBS Money Watch and other consumer finance websites.
Ask Barry a question, or see if your question has already been answered in the Speaking of Credit answer archive.
Dear Speaking of Credit,
Please help! I have had a 750 or higher credit score for years. I pay on time, and keep a balance on one or two cards. Recently, I received a notice from Experian that my credit score was reduced by 47 points! I am completely panicking as I work hard to maintain it.
I called Experian, and they literally cannot figure it out. This is obviously frustrating as they are the ones who are lowering my score.
I believe it was caused somehow by my accepting an offer for a Wells Fargo 0 percent interest card, and doing a balance transfer. I used the Wells card’s credit limit – $8,000 – to pay off two other cards – my AmEx and my Citi Diamond card, which have now a zero balance.
Can you help me figure out what caused this? I was under the impression I would get a better score as I increased my credit availability overall by $8,000 but did not increase my debt.
I am buying a car soon. I am terrified this will affect me negatively. Thank you so much for your help. – Kirk
Despite Experian’s understandable difficulty in accounting for your 47-point score loss, you appear to have hit the nail right on the head. Your score drop was no doubt caused by the opening of that Wells Fargo card and the balances transferred to it.
From a common-sense standpoint, you did the right thing by accepting this 0-interest card offer, especially since you had existing card balances incurring (probably) high interest. But from a credit scoring standpoint and considering you’ll be looking to finance a car soon, it might not have been the best timing.
The information you’ve shared points to at least three likely scoring suspects, all having to do with the new card. In order of impact, they are:
- Credit card utilization: higher individual card utilization after the transfers.
- Length of credit history: shorter average account age due to recent account opening.
- Hard inquiry: typically only a five-point loss, but it could be more.
Let’s take a closer look at how each one of these variables impacted your score.
1. Credit card utilization.
You wouldn’t expect utilization to be a problem after, as you’ve done, adding $8,000 of available credit to the same card balances.
Video: What is your credit utilization ratio?
Yet moving debt from one card to another can be dangerous for your score when doing so raises the utilization on the receiving end of the transfer.
Credit card utilization – the second most important factor in credit scoring after making on-time payments – isn’t just a single calculation made up of your total card debt and total credit card availability.
It’s best to think of utilization as consisting of two major calculations – together almost 30 percent of your score – that measure how much you owe:
- Combined card utilization. Total utilization when all balances and credit limits are considered tends to be the most influential of the two scoring calculations.
- Individual card utilization. Treated separately from combined card utilization, and usually with less impact, having even just one “highly utilized” card can lower your score.
So, while you were on the right track by considering that the addition of $8,000 available credit should help your score by lowering overall utilization, you may have overlooked the negative impact that can come from a single highly utilized balance transfer card.
2. Length of credit history.
- Average account age. This important scoring calculation adds the total number of months for each account and divides it by the number of accounts on the credit report. Introducing a new card with only a month or two of history can lower your average account age.
- Age of newest account. When it comes to the various calculations measuring your length of credit history, older is always better. This also holds true for the age of your newest account, which gets younger when a new one is opened.
3. Hard inquiry.
The typical additional hard inquiry counts for only about five points, more or less.
The “more or less” often depends on your overall credit experience, such as how long you’ve been using credit, how many credit accounts you have and your payment history.
For example, someone new to credit with only one account might see more of a point loss from a single additional hard inquiry than someone with a longer and varied credit history.
How quickly can your score recover from a 47-point drop?
As long as this conversation excludes late payments – otherwise, your case could require some serious recovery time – your score could make a relatively quick turnaround with some attention paid to that new card, if you:
- Pay down that balance transfer card by as much and as soon as possible, lowering what is probably your only highly utilized card.
- Allow the Wells Fargo card some time – six months to a year or more – to age.
- Prevent further inquiries or new accounts by steering clear of card offers and credit applications.
When it’s safe to go car shopping
If you need to buy a car soon, your current score in the 700 vicinity should qualify you for a loan, though probably not at the best rates.
If you can, squeezing a few more miles out of the old car while paying down the new card could get you a lower interest rate worth hundreds of dollars saved over the life of the loan.
Either way, following the above advice should have your score back at 750 in a reasonable time and without much extra effort.
Whatever you do, good luck!
Tip: Credit scoring formulas measure both your combined card utilization and the individual utilization on each one of your accounts. Want to keep an optimal credit utilization ratio? Split your credit utilization across all your cards and, if possible, try to keep both your combined and individual card utilizations below 30 percent.
See related: How does a balance transfer affect your credit score?, With balance transfers, watch your individual card utilization, Our best balance transfer cards
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