Requesting a new credit card is something that many consumers do for reasons such as rewards, convenience, or special financing. However, some people have concerns about how this may bring some harm to their credit scores just by applying for a new card. But does it mean that getting a new credit card reduces your credit score? The short answer is yes, but only in the short term in most cases.
There are a few key reasons why applying for and opening a new credit card account can result in a small, temporary drop in your credit scores:There are a few key reasons why applying for and opening a new credit card account can result in a small, temporary drop in your credit scores:
Hard Inquiry When one applies for any form of credit such as a credit card, car loan or a mortgage, the company is going to perform a hard pull on the borrowers credit report. This is reported on your credit report and will cause a dip of a couple of points on your score. However, hard inquiries only remain on credit reports for 12 months and their effects reduce as the years go by.
Lowered Average Age of Accounts Length of credit history is one of the components of the FICO credit score and it constitutes 15 % of your total score. Finally, each credit account has its own average age and when you open a new credit card it decreases the average age of all your credit accounts. This can take a few points off your scores because younger accounts are considered more risky. However, if the new account is used responsibly as the months pass by, the effect is not as severe.
Lower Credit Utilization Ratio This factor contributes to around 30 % of your FICO score. It is the total of balances divided by the total of credit limits. Just having a new card opens up a new line of credit, so your credit utilization is lower if your balances remain the same. I think lower utilization is good for credit rating but when you drop maybe from 30% utilization to 10% sometimes the rating drops.
The best thing to note here is that even though applying for and opening new credit, particularly causing the immediate impact, will only result in minor points deductions, responsible use of the account over the long term will usually offset these impacts. Now let us look at how each of your scores is affected.
The New Credit Card Application Credit Check Inquiries account for about 10% of your overall FICO credit score. If you apply for a credit card, the credit card company will pull your credit report and your credit score as part of the application process. While it falls under the hard inquiries category, a hard inquiry can reduce your credit score by a few points but stays on your credit report for one year.
They are even more influential when you have little credit history and many inquiries are already present in your credit report. Those with good credit and low inquiries will be less impacted.
Is Preapproval Soft Credit Check Bad for Your Credit Scores? There are many credit card issuers who will let you know whether you’re pre-approved for their cards just by conducting a soft credit pull. This soft pull of your credit file will NOT in any way affect your credit scores. First, it can help you estimate your chances of approval without harming your scores in any way. If the odds look decent, you can fill in a full application.
New Credit Card Account & Age of Credit History The length of credit history of all accounts is equal to 15% of your FICO score. If you are holding a credit card which is brand new, then, by its very nature, it possesses no length of credit history. And it therefore lowers the overall age of all your credit. Thus it having a small negative effect on credit scores since greater history is better.
However, as the new card gets older, the effect decreases and can even turn into a long-term positive factor affecting your scores. Only try to let your longest active card keep on aging as well and do not try to pay off your oldest accounts if possible.
What About Closing Old Credit Cards? At times individuals believe that they must cancel old credit card accounts which they rarely use, before applying for a new card account. This is NOT a good strategy! It’s those old cards that further age and contribute to the overall length of your credit history. It is correct to close accounts that have annual fees which are not compensated by potential rewards and incentives for maintaining the account.
Introduction to a New Credit Card and the Rate of Usage The experience shows that getting a new card can affect this factor positively or negatively at least in the short run since the rate has a rather hefty impact on your scores. Credit utilization ratio refers to the total amount of money used on all credit cards in relation to the total credit limit available.
Suppose your total limit on all the cards is 10,000 and average balance is 3,000. That is 30% of full utilization in that area. You now get a new card with the credit limit of $ 5000. Your total limits in all cards rises to 15,000 while your balances stay at 3,000. Now your utilization rate is 20percent (3000 divided by 15000).
In the medium term, lower utilization is a favorable outcome regarding credit scores. In the first 1-3 months, your scores may slightly be lower due to the new account but it will improve later. Over the next 12-24 months, keeping the account active but not overutilized and thus giving the scores time to mature will improve them.
Reducing the Negative Impact of New Credit Accounts Heres a quick recap of steps you can take to reduce temporary dings to your credit scores when opening a new credit card:Heres a quick recap of steps you can take to reduce temporary dings to your credit scores when opening a new credit card:
It is advisable to first perform a soft credit check for preapproval to determine the chances of approval before allowing hard checks. This does not affect your scores in any way. Limit the number of applications and dont apply for several cards within a short period to reduce the number of hard inquiries. Another strategy is to space out applications by 6-12 months. Therefore, it is advisable to introduce new applications when your credit card usage rates are likely to be lower in the following three months. This can help counter balance short term model changes. It is alright for any old or inactive cards to keep aging without being closed just because they are inactive. Let the longest aged accounts remain even older. Pay for new cards in full each month to eliminate interest costs on the new credit limit. Allow the account 12-24 months for the full positive credit building effects to come into play.
The Bottom Line In most instances, the 3-6 month credit score drop resulting from applying and qualifying for a new rewards credit card is small. In the case of individuals with good credit status, and limited inquiries already existing on credit reports, it drops by less than twenty points before rising again. In the case of the others, a decrease of between 50-75 points may be experienced.
However, when compared to the long term possible benefits of managing a new account more responsibly with increased credit limit these worries are often negligible in the grander picture. Simply be choosy about handling card applications, do not close off old accounts and keep balances responsibly low.
