Requesting for a new credit card is something that many consumers do in a bid to benefit from the rewards, for borrowing purposes, or to improve on their credit status. Though, a typical worry is that applying for a new credit card may actually harm your credit score. Thus, it raises a question: does getting a new credit card reduce the score? The short answer is possibly for the short term but most probably not in the longer run as long as one takes good measures concerning credit cards.
Any time you apply for a credit card or any type of credit, the issuer is going to pull a hard credit inquiry. This involves them to drag your whole credit report from one of the three major credit reporting agencies, which include Experian, TransUnion, and Equifax. He or she also noted that it is advisable to avoid multiple hard inquiries within a space of 14 days since it would be considered as risky to the lending institutions and cause the credit score to drop by a few points until the inquiries drop out of the credit report. While hard inquiries are reflected on your credit report for 12 months, they affect your scores for approximately half that duration.
Therefore, one new credit card application will not significantly affect anyone’s credit score unless the individual has bad credit. Most credit scoring systems do not actually have a negative reaction at all to a single hard credit check. Where consumers often go wrong is applying for too much of the available credit at a time, be it credit cards or credits cards, personal loans, auto loans etc This is a sign of risk and is likely to reduce your scores more deeply.
The other scenarios where short-term scoring changes can occur include when you open a new account such as a credit card. When new lenders report your new account to the credit bureaus it brings down the average credit utilization assuming you have other old accounts. Since scoring models factor in the length of credit history, that average age becomes slightly smaller when you get a new credit card.
However, the effect on your scores is relatively moderate and only lasts a few months in most instances – just like with hard inquiries. So as long as you wait sometime before applying for new credit accounts you do not fall into what is referred to as credit seeking behavior that will ring more long-term alarms. Your score should increase in months depending with your credit card practices, more so not carrying forward balances on your credit cards.
Indeed, it is possible to see that active opening and using new credit cards will rather help improve credit scores in the long run rather than deteriorate them.
Does Getting a New Credit Card Lower Your Credit Utilization Rate?
If you do not have balances on your credit cards, receiving a new credit card is likely to increase your overall credit utilization, thus helping to raise low credit scores. This credit utilization rate is the ratio of credit used to the total credit limit available to the credit holder.
Credit scoring systems regard a large credit limit for credit cards as credit risky and a small credit limit as credit prudent. In general, try to maintain the balances on your cards below 30% of the total credit limit although the closer you can get to 10% the better.
As soon as you open a new card it does not reduce your standing credit limits of other cards hence an immediate increase in the total available credit. If the spending and balances on credit cards remain constant and you have a higher total limit, your utilization ratio becomes lower. For example:
You have 1 credit card which has limit of 2000$ and the balance which was paid monthly is 500$. Your utilization rate is 25% ($500/$2,000). You open a new card with a credit limit of $5,000. Your total credit limit combined between both cards is $7,000. Assuming the same $500 for maintaining the balance, the new utilization rate will be 7% ($500/$7,000). That lower percentage is less credit risk and can help increase your credit scores as long as the card issuer reports your new higher limit to the bureaus. Just because you have more credit available do not take the liberty of spending more than you need to. Such a shift would probably raise your usage once more, thereby negating any scoring advantages.
Does obtaining a new credit card enhance your credit rating?
There are other positive impacts of opening a new credit card account responsibly as well, apart from the impact on your credit utilization ratio. As mentioned, when total available credit is more than your spending requirements, you are portray responsible behavior to the scoring models. Also, employing cards (when cleared on time) proves to lenders that one is capable of handling credit privilege well.
For instance, getting new credit cards as you have a low or nonexistent credit score shows to other creditors that someone out there has considered you qualified for more credit facilities. Credit access like this, when properly utilized should thus help in boosting your scores in the long run.
Moreover, by obtaining secured credit cards, specifically, one can start improving credit history, especially if you did not have credit history or it is bad. Secured card credit limits are equivalent to refundable cash deposit you give to the credit card company as guarantee. It then charges the cards like normal credit card, and report the charges to the credit bureaus. When managed by always paying your balances, this shows responsibility and can in turn affect your scores positively.
Other pros of responsibly getting new credit cards include:Other pros of responsibly getting new credit cards include: Providing you with registration bonuses and potential other opportunities for cardholders’ rewards. Transferring the balances on cards with higher interest rates to one with a lower interest rate. Gaining approval for credit cards that can be used repeatedly depending on the ability to pay the balances to zero. This saves time for the accounts and avoids the processes of reapplying and opening new accounts all over again. Also, do not open more accounts than you need for real just to boost the scores since it’s against the rules. It is advisable to apply for credit only when necessary for the requirements of the household and for specific financial requirements.
Affecting New Cards Least on Your Credit Score
Aside from waiting for several months before applying for credit, there are other measures you can use to lessen the impact of even the minimum scores drop from new credit accounts. First of all, one should ensure that they clear more balance on their cards before applying for any other card. This reduces your usage beforehand, so fluctuations can affect it to a lesser extent. You can also ask for increased credit limits on existing bank credit cards. It increases your total credit limit without applying for other credit accounts thus does not affect your credit score.
Finally, establish long-term good credit standing by making the payment on all the credit cards to ensure that the balance is zero immediately new accounts are created. Always, be sure to make more than the minimum due and also make sure to make the payment before the due date of each statement. This is because positive payment histories mean that one is financially responsible and this is what helps one get high credit scores.
The Takeaway
It means that applying for a new credit card or two over time will not reduce your credit scores to the ground. As long as you do not open too many accounts simultaneously or spend beyond your capacity, fluctuations will not be long-lasting. Timely and wise utilization of credit cards that do not result in high balances and which demonstrate good payment history will negate the negative effects of inquiries and short average account history. A new card that assists in the creation of good credit history is a good investment for the future.
