Applying for a new credit card can lead to a slight decrease in your credit score due to the hard inquiry conducted by the issuer. However, responsible use of the card can improve your score over time. Here’s a detailed look at how credit card applications affect your credit score.
Applying for a new credit card triggers a hard credit inquiry, which may cause a temporary drop in your credit score by a few points. These inquiries can stay on your credit reports for two years but only affect your FICO score for one year. Pre-qualifying for a credit card allows you to gauge your approval chances without impacting your credit score. It’s important to note that pre-qualification is not a guarantee of approval. Opening a new credit card can impact your credit score in several ways beyond the hard inquiry. Adding new credit to your reports can affect your score as it accounts for 10% of your FICO score. The impact is more significant for those with a shorter credit history. The average length of your credit history, which makes up 15% of your FICO score, may decrease with the addition of a new credit account. This includes the ages of your oldest and newest accounts, as well as the average age of all accounts. Using a new credit card responsibly, such as making on-time payments, can help build your credit over time and improve your credit score significantly. Understanding the effects of credit card applications on your credit score can help you make informed decisions about whether to apply for a new card.Applying for a new credit card can impact your credit score in various ways. When you open a new card, it becomes your newest account, potentially lowering the average age of your accounts, which could cause a temporary drop in your credit score. This impact is more significant for those new to credit and less so for those with an extensive credit history.
To enhance the length of your credit history, it’s advisable to continue using credit responsibly over time and avoid closing old accounts in good standing, unless they incur unnecessary fees.
Increased debt from a new credit card can lead to missed payments if you tend to use your cards excessively, maxing them out and carrying balances. This can make it harder to pay bills on time, which can negatively affect your credit score. It’s recommended to stick to a budget and not increase spending with the additional credit.
However, a new credit card can also improve your credit score if used responsibly. Your credit utilization ratio—the amount of credit card debt compared to your total available credit—could decrease if you don’t increase your monthly spending. For instance, with a $1,000 balance and a $2,000 limit, your ratio is 50%. Opening a new card with a $2,000 limit drops your ratio to 25% ($1,000 out of $4,000). This ratio accounts for 30% of your FICO score, so a significant reduction can boost your score. Financial experts suggest keeping this ratio low, with some recommending below 10%.
Your on-time payment history is crucial for your FICO score, comprising 35% of it. Consistently making on-time payments on your new credit card and other debts can improve your score over time.
Opening a credit card can improve your credit mix, especially if you don’t have any other credit cards on your credit reports. Managing diverse financial products like credit cards, personal loans, and mortgages can boost your score and signal responsible credit management to lenders. Credit mix accounts for 10% of your FICO score, so a lack of variety won’t significantly hurt your score.
It is advisable to wait six months between applying for credit cards to avoid hurting your credit. Multiple hard inquiries in a short period can be a red flag to lenders and harm your credit score. Card issuers may have their own rules about how often you can apply for new credit cards, so it’s important to check the fine print.
Being denied a credit card won’t directly damage your credit score. However, the lender will likely have run a hard inquiry, which could ding your score by up to five points. This happens whether you’re approved or denied, but pre-qualification has no impact on your credit score.
Getting a credit card and never using it can reduce your credit utilization and improve your score, but it could also cause the issuer to close your account due to inactivity. Then you would have a hard inquiry from the application, which can have a slight negative effect, with nothing to show for it. Closing an old account or having it closed for inactivity can decrease the average age of your accounts and increase your credit utilization ratio, both of which could harm your credit score. Some cards have annual fees, which aren’t worth paying for a card you never use.
It’s generally a good idea to keep old credit card accounts open, since you should avoid shortening the length of your credit history for no reason. If the card has an annual fee and you don’t plan to use it, it makes sense to close it. Alternatively, you can ask the card issuer about downgrading to a version with no annual fee. You may need to use a card every once in a while to avoid an automatic closure due to inactivity.
Having at least one credit card can improve your credit mix and help you build your credit score over time as you make on-time payments. Multiple cards may be beneficial if you can maximize rewards programs and stay on top of your bills, but avoid opening more credit card accounts than you can keep track of or use regularly. Many hard inquiries and more new credit accounts can bring your score down. That said, it’s usually not a good idea to close old cards unless they have annual fees, and simply having more credit cards will not hurt your credit score—just be sure to use them responsibly.
The bottom line is that before applying for a new credit card, think about how it will impact your credit score. If you plan to take out a car loan or mortgage soon, you may want to hold off on the credit card application to avoid a hard inquiry and a slight drop in your score, so you can get the best rate possible.
If that’s not a concern and you would truly benefit from using the card, don’t worry about the hard inquiry. Just focus on making on-time payments and keeping a low credit utilization ratio. If you use a lot of your available credit each month, consider paying down the balance before the end of the statement period to reduce your reported utilization. Avoid applying for too many credit cards in a short time and don’t use a new card to spend more than you can pay off. If possible, pre-qualify with different credit card issuers to check your chances of approval without affecting your credit score. Read the fine print to know interest rates, fees, and rewards.