When it comes to managing your own money, there are few things more valuable than the number that represents your credit rating. This three digit number determines your chances of being qualified for loans, credit cards and other related products. It can even affect your chance of getting a house or a job you want as a tenant or a job seeker.
As you can imagine then, everybody will do anything within their power to ensure that their credit scores are not compromised. But one thing that almost everyone asks is whether applying for or opening a new credit card is going to hurt their credit score. After all, if new credit cards are considered as an indication that pushing the credit limit will be bad for your score, then the most sensible thing to do is to avoid applying for it.
To answer it in few words – yes, opening a new credit card can indeed negatively impact your credit score, but only slightly for a short while. Nevertheless, the decrease is not usually very drastic, and your score will begin to rise as soon as you demonstrate good credit card behavior for several months. And in the long term, it is possible to open new credit cards for credit history and to increase a credit score.
Here is a breakdown of how opening a new card impacts your credit score and when you should consider applying for new lines of credit.
Why New Credit Cards Lower Your Score Temporarily
When you apply for a credit card, the credit card company pulls your credit report from one, two, or all the three credit bureaus including Experian, TransUnion, and Equifax. This is referred to as a ‘hard search’ and it pops up on your report every time you apply for new credit.
Multiple hard inquiries in a short period indicate that the lenders consider you as high risk, and this can reduce your score by a few points. Specifically, every new hard inquiry can cost you about 5 points of your credit score or even less.
Besides, opening a new credit card can also reduce the average age of credit history as one of the potential drawbacks of a hard credit check. This factor also affects your score in that the longer the average history, the better your score. This means that when you open a new card, you get a newer account and this in the long run reduces the average age of all your credit. This could shave a few more points off your score.
Luckily, such negative effects are relatively small and often fade away within months of starting the exercise regime. However, as long as you maintain the card and pay your bills on time, your score should soon begin to rise and possibly surpass the initial score.
When Is It Safe To Apply For New Credit?
So if you are applying for a mortgage or auto loan and you want to ensure that you have the highest credit score possible, then you should avoid applying for any new credit at least 6 months, or more preferably before you apply for credit. This ensures that your score has enough time to counter balance any negative impact that may be brought about by the new account.
However, if you have no intention of applying for a major new loan anytime soon, it may be perfectly fine to apply for credit and get even such bonuses as generous sign-up ones. As long as you are paying your balances on time each month, new accounts add to the history and could offset the brief dip of a few points.
Measures to Reduce Any Score Harm
If you’re worried about opening a card and lowering your credit score ahead of a big lending decision, there are a few things you can do to mitigate potential damage:If you’re worried about opening a card and lowering your credit score ahead of a big lending decision, there are a few things you can do to mitigate potential damage:
The best way to avoid a lot of hard inquiries in a short period is to space out credit applications 6-12 months apart. Also, when it comes to credit, do not apply for credit when you do not necessarily need it, do not apply for several cards in one go.
Encourage issuers to ask you to provide your report from a credit bureau different from the one your primary lender utilizes. This helps to avoid the situation where a new account which you might have opened appears on the report of your main banking institution.
Contact the issuers reconsideration lines to discuss your application issues and if they will approve you when you don’t have to do a hard inquiry. This is not always possible though I have come across situations where it can work to let you open accounts without apparent hard inquiries.
To counter decreases from new accounts, you can increase your score in other ways such as paying down credit card balances or challenging inaccuracies on credit reports. Even these small score changes can help you convince creditors that you are as credit-worthy as before even with the new credit card.
Opening Accounts Strategically
Instead of perceiving new credit cards as threats to your credit score, more accounts should be planned, opened to provide maximum advantage in the mid to long term. Thus, the short-term effect on the total score is not very significant, while the long-term advantages of openings at strategic accounts are more prominent and long-lasting.
Experts generally recommend opening new credit card accounts only when you have a specific, longer term purpose in mind, such as:Experts generally recommend opening new credit card accounts only when you have a specific, longer term purpose in mind, such as:
Getting a sign-up bonus of a few hundred dollars or more in cash or travel rewards
Utilizing the limited time validity of a higher signup bonus
Landing a 0% intro APR to avoid interest expenses on balances you’ll pay off during the promotion period
Increasing it slowly by adding accounts with a good payment history and no missed payments
This can be accomplished by adding installment loan accounts such as personal loans to your credit portfolio in addition to revolving credit card accounts.
Enjoying privileges and benefits that are only available to users of specific cards, such as the AMEX or Chase cards.
As you can see, there are endless wise financial motives for opening new accounts as time goes by. Although there will be a small impact on credit score, in many situations the long term benefits more than make up for it.
The Bottom Line
A new credit card application can bring a slight decrease in credit score due to the new hard inquiries and the decrease in average credit history. But for most people, the change is by a few points and it is typically temporary or only lasts for a few months.
There are several ways to reduce the impact on your score – applying for credit only occasionally and persuading the issuers to request reports from the less popular bureaus. But if timed correctly the convenience and benefits of opening new accounts will more than make up for the decreases in most instances.
Thus, it is logical to restrict the creation of new accounts during the application for a mortgage or other loan in the short term; however, occasional new accounts may be useful for your financial situation and involve slight score repair in the long term. If you have been paying balances responsibly then there is every possibility of your score recovering within several months.
