Whenever you apply for credit, including credit cards, the credit provider will pull a credit report under a hard inquiry. This means that they will pull your entire credit file information in order to assess your application. That is why it is advised not to make too many hard inquiries within a short time frame. But, applying for one credit card is not going to a bad impact on your credit score; it is just going to drop a little and that too for a short period of time. If you follow the right usage of the card, it will only have a temporary impact on your score.
What is a hard pull credit check?
As you apply for a credit card via the internet; through a branch or by phone, the bank will use the information you have provided to request your credit report and credit score. They do this in order to assess whether or not you qualify for a loan and whether or not you are a responsible credit user. The credit check of this type is known as a hard inquiry. Hard inquiries can reduce your credit score though the effects are usually small, of about 5 points or less. While the identical number of hard inquiries has a relatively small impact, too many of them within a short period of time can suggest the borrower is a higher risk to lenders and have more of a detrimental effect on the score.
How Long Does Hard Inquiry Affect Your Credit Score?
The effects of a hard credit check typically last for less than half a year. Even most scoring models will exclude it from your score after one year of usage. Hard inquiries take two years into your credit score before they stop affecting it and they are completely removed from your credit report after the same two years. When you apply for many credit cards within two months, you may observe a somewhat bigger though still moderate decrease in your score that usually takes up to a year.
Does soft credit check affect credit score?
There are two broad categories of credit checks, namely the hard check and the soft check. Whenever you run a credit check on yourself, or when a lender pulls your credit file without your consent or request, these are known as soft pulls. It is also possible that potential lenders perform soft checks in order to send prescreened offers. For instance, when you receive a letter that reads ‘You Are Pre-Approved,’ that is a soft credit check. The good thing is that soft inquiries do not in any way impact your credit score. This enables you to view your personal credit report and even check qualifications for products of your interest without having a negative impact on your credit rating.
Elements That Can Counterbalance the Impact of the Drop in the Hard Inquiry Score
The only negative impact of opening a new credit card account is the new hard credit check which can result in a slight decrease of your score for a short period of time. Most of these factors balance out the effects of the hard inquiry once you begin to use your new card appropriately.
Lower Credit Utilization Ratio
Credit utilization ratio is calculated as a percentage of the total amount of credit that one has actually used. Less credit utilization is good for your credit score. Even if you are spending the same total amount of money every month on credit cards, your overall utilization ratio reduces because you have more unused credit facility when you open a new credit card. To be able to do this, the following guidelines should be followed as it may help to increase your score. However, just make sure you do not spend more than you have in your account because of the available balance.
Increased Credit Mix
Credit scoring models prefer when you have a good history of handling different types of accounts. It is better to have credit cards together with installment credit such as car loans, house loans or student loans. Applying for a new credit card and being approved but having only records of installment loans on your credit files will help to boost the score due to demonstrating credit versatility.
Build Your Credit History
The length of credit history is another determinant of your score. Getting your first credit account is the first step in the process that begins the building of the credit history that lenders like to review. As the account matures and you are able to handle payments and credit limits effectively this will positively affect your credit worthiness. However, to demonstrate that credit is still actively being used, it is recommended to open new accounts occasionally even after many years.
How to Avoid Negative Impact of Opening Additional Credit Cards
However, if you are willing to apply for a fresh credit card account but have concerns that this action will have a damaging effect on credit rating, there are some measures that can be taken to minimize these negative effects. Consider these tips when applying for a new card:Consider these tips when applying for a new card:
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Check your credit first: Check your credit report with FICO or a VantageScore before the application. If you have a low score, avoid submitting new applications and instead concentrate on credit repair.
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Space out applications: Do not apply for multiple cards at a time but rather for one card only at a time. A large number of new accounts and hard inquiries within a short period will attract the attention of credit grantors. Allow at least three to six months between the applications.
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Ask the lender to check your score with a soft inquiry first: Many banks will first perform a soft pull to give you pre-approved offers before you apply. This helps you to gauge the chances of approval with little effect on your scores.
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Apply for credit limit increases on existing cards instead: Instead of applying for new credit cards, request for increased credit limits from your existing credit card companies. It provides you with more credit available and less credit utilization without another hard credit check.
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Offset hard inquiries by lowering other balances: If the total credit card balances are high compared to the limits then it is better to bring the balance to the minimum before applying for another credit. The lower utilization could increase your score by a noteworthy margin and offset for the implementation of a hard inquiry.
The Takeaway
The act of a new credit card application results in a slight drop in your score, normally less than five points, for sometime because of the hard enquiry on your credit files. However, it is advisable to use this account responsibly including ensuring that you pay your statement balance on time and check your utilization rate; the negative impact is likely to be reversed within six months. In fact, your score will start rising right from the moment you open a new account due to the reduced utilization and enhanced credit facility. If proper financial habits are adopted, applying for a new credit card can only be advantageous for your credit score.
