Question: Can a new credit card account drop a credit score by 40 points? I noticed my score dropped on Credit Karma and lists a new credit card as a new account. I thought that a new active line would improve instead of hurt my credit score.
Answer: Credit scores can drop when you open a new credit account if you have been managing credit for a short time or have a thin credit file. That’s because new accounts will lower your average account age (AAoA), which can have a large effect on your score if you don’t have a lot of other credit information.
Even if you have used credit for a long time, opening a new account can still lower your credit score. When you open a new credit card account; that new account will be included in the number accounts on your credit report and will lower the average age of all your accounts.
If you apply for several new credit cards within a short period of time, multiple credit inquiries can also lower your credit score. One inquiry can lower a credit score by as much as 5 points. But inquiries can have an even greater impact if you have few accounts or a short credit history.
Once you begin making on-time payments on the new account and continue to make timely payments on other obligations your credit score will recover. You also have to keep balances low on credit card accounts in order to improve your score which means you should only use 30% or less of your available credit limit. For example: Your credit limit is $2500 then your balance should be no more than $750. Now if you pay in full each month, credit utilization does not matter because you don’t carry a balance.
About Scores at Credit Karma
Credit Karma is a good tool to let you know what information is on your report but the credit score is not the one used by most banks, lenders and credit card issuers. This score is derived from TransUnion’s proprietary scoring formula, called TransRisk.
The formula used to determine your TransRisk score isn’t as precise as that for a FICO score. And, according to the Consumer Financial Protection Bureau, the TransRisk scoring formula is specifically designed to predict risk on new accounts, rather than new and existing accounts. That may be the reason for the dramatic drop in your Credit Karma score because you added a “new account.”
You should not rely on TransRisk credit scores as a guide to how creditors will view your credit quality; it is primarily used as an educational score. For the credit score most likely used by potential lenders, you’ll want to purchase your FICO scores from myfico.com.
The best of luck to you.