Does Applying for a Credit Card Hurt Your Credit Score? | Global News Avenue

When you apply for a new credit card, you may find that your credit score drops slightly. That’s because credit card issuers run a hard query on your credit report when deciding whether to approve your application, and a hard query can cause your score to temporarily drop.

However, it is actually approved and Open a new credit card If you use it responsibly, you can improve your credit score immediately or over time. Overall, if you understand a credit card and find it useful, negative credit implications shouldn’t stop you from applying. Here’s a closer look at how adding a new credit card to your wallet can affect your credit score.

How applying for a credit card affects your credit score

Apply for a new credit card– Whether or not you’re approved – may cause a temporary drop in your credit score. When you submit your application, your credit card issuer will run painstaking inquiry Check your credit report to see how you have used credit in the past. Rigorous questioning may lower your score slightly—usually by five points or less.

This hard inquiry can stay on your credit report for two years. However, it only affects your FICO score for one year, and the impact diminishes over time. As long as you don’t apply for a lot of different credit accounts, there’s nothing scary about a hard inquiry. If you pay your bills on time and practice other positive credit behaviors, you may see your score rebound within a few months.

How a new credit card can hurt your credit score

If you get approved for a new credit card, it can hurt your credit score in several ways (besides the hard inquiry on the application).

More new credits on your credit report

Adding new credits to your credit report can hurt your score. The “New Credit” category accounts for 10% of your FICO scorebecause research shows a link between credit risk and opening multiple accounts in a short period of time. However, the negative impact of a new credit account is greater for consumers with shorter credit histories, so if you’ve already had a credit history built up over many years, it may not have as big of an impact. Either way, this category accounts for a relatively small portion of your credit score.

The average length of your credit history will decrease

The length of your credit history accounts for 15% of your FICO score, including the ages of your oldest and newest credit accounts, as well as the average age of all accounts. When you open a new credit card, it becomes your newest account and lowers the average age of your accounts, which can cause your credit score to drop. The impact will be greater if you are new to credit and less impactful if you already have a long experience with credit. Credit history.

To extend the length of your credit history, continue to use credit over the long term and avoid closing old accounts in good standing unless you no longer use them and they charge monthly or annual fees.

Increased debt may lead to missed payments

One final factor worth considering is how opening a new credit card will affect your spending habits. If you use your credit card frequently, max it out and/or carry a monthly balance, a new card may result in increased debt as your balance grows.

The more debt you have, the more difficult it becomes to pay your bills on time. If you miss a payment, your credit score can take a big hit. Instead, try stick to budget And don’t increase your spending as your credit grows.

How a new credit card can help improve your credit score

The impact of a new credit card on your credit score isn’t all bad. In fact, a new credit card If you use it responsibly, it can have a positive net impact on your credit score immediately and over time.

Your credit utilization ratio may drop

If you open a new credit card and don’t increase your monthly credit card spending, the newly available credit will reduce your credit limit credit utilization ratio—The amount of your credit card debt compared to your total available balance.

For example, let’s say you have a credit card balance of $1,000 and a credit limit of $2,000. In this case, your credit utilization ratio is 50%. But if you open a new card with a credit limit of $2,000 as well, your credit utilization ratio will drop to 25% ($1,000 of a total limit of $4,000).

Your credit utilization ratio accounts for 30% of your FICO credit score, making it the second largest factor, so lowering that ratio significantly could significantly improve your score.

Financial experts recommend keeping your credit utilization ratio low, although there are no set rules for the optimal ratio. Experian recommends a credit utilization ratio of no more than 30%. FICO says this threshold is not as set in stone as is often thought, but instead recommends keeping it as low as possible — less than 10% if possible.

On-time payment history can improve your score

Your payment history is the most important factor in your FICO score, accounting for 35%. Lenders want to see that you pay your bills on time. Late payments will lower your score, while on-time payments will increase your score over time.

By consistently making on-time payments on your new credit card, as well as any other cards or loans, you should see your credit score rise, all other things being equal.

Your credit portfolio will improve

Opening a credit card can also improve your life credit portfolioespecially if you don’t have any other credit cards on your credit report. Showing that you can manage a variety of financial products, such as credit cards, personal loans and mortgages, can improve your score and demonstrate responsible credit management to lenders. If you already have multiple credit cards, adding a new card may not improve your credit portfolio, but it won’t hurt it either. Credit mix accounts for 10% of your FICO score, so a lack of diversity in your credit report won’t hurt you too much.

Frequently Asked Questions (FAQ)

bottom line

Before you open a new credit card, consider the impact applying will have on your credit score. If you plan on applying for a car loan or mortgage in the near future, you may want to wait to apply for a credit card to avoid triggering a hard inquiry and affecting your score slightly so you can get the best interest rate possible.

If that’s not an issue and you actually benefit from using the card, you don’t have to worry about tedious inquiries and just worry about making your payments on time and keeping your credit utilization low. If you tend to use a lot of your available credit each month, consider paying off your balance before the end of your statement period to reduce your reported usage. Avoid applying for too many credit cards in a short period of time, and don’t use new cards to spend more than you can afford to repay.

If possible, it’s worth pre-qualifying with various credit card issuers to check your chances of approval without affecting your credit score. Read the fine print carefully and familiarize yourself with interest rates, fees, and incentives.