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If you’re considering applying for a new credit card, but are concerned about your current credit score, you may wonder if applying will hurt your credit.
There is no simple answer to this question, so here we’ll explore this topic in more detail, so you can make an informed decision for your financial future.
How Applying for a Credit Card Affects Your Credit
When you complete an application for a credit card, it will trigger a hard credit inquiry. There are two types of inquiry; hard and soft. Soft inquiries don’t impact your score as they are information-only requests, but a hard inquiry is made for the specific purpose of obtaining additional or new credit.
When a hard inquiry is requested, your credit report and score will be affected. Requesting new credit signals an additional risk to your credit, and your score can dip by a few points for a month or two. This is because it will not be clear why you need more credit, and you will not yet have demonstrated that you can handle this additional credit.
So, when you apply for a credit card, there are several ways your credit can be affected, depending on your circumstances, which we’ll discuss in more detail.
In What Situations Would Applying for a Credit Card Significantly Hurt Your Score?
There are a number of scenarios where applying for a new credit card could significantly hurt your score. These include:
- You’re Going to Use the New Card Immediately
If you apply for a new card and are planning on making a large purchase immediately, it could have an adverse impact on your credit score.
In this case, while you may add more available credit, you are looking to immediately use it, which will reduce your credit utilization and debt to income ratios.
These are both significant factors when the credit bureaus are calculating your credit score, so your score could drop.
- You’re Likely to be Rejected
Although you’ll get the same hard inquiry on your credit report regardless of whether you’re approved or rejected, if you’re likely to be rejected it could significantly hurt your credit score.
The reason for this is that you are likely to have to reapply for another product within a short time frame, so you may have multiple hard inquiries on your credit report, each knocking your score by a few points.
This can create a cumulative effect that could drop your score from good to fair or worse, fair to poor.
- You’ll Lower the Average Age of Your Accounts
How long that you’ve held credit accounts is also a consideration when the credit bureaus calculate your credit score. So, if you apply for a new card, it could reduce the average age of your credit.
For example, if you have just one other credit product that you’ve had for five years, a new card would reduce your average down to three years.
Cases Where There is a Small or No Impact on Your Score
On the other hand, there are some cases where there would be a small or no impact on your credit score. These include:
- You’ve Already Got a Low Average Length of Credit: If you have multiple credit accounts, adding a new credit card is unlikely to have a massive impact on your average length of credit.
- You’ve Got an Excellent Score: If you already have an excellent credit score, you’re not likely to notice the few points drop caused by the hard credit inquiry.
- You Don’t Have Credit Cards on Your Report: Both FICO and VantageScore evaluate the different types of accounts featured on your credit report. If you have a diverse selection of credit products, it can be good for your credit score. So, if you only have personal loans on your credit report, adding a credit card will add revolving credit and increase your score.
Considerations When Applying for a New Card
While it may be tempting to go for an attractive credit card deal immediately, a few factors must be considered before applying for that new card.
- Are You Planning a Major Purchase? If you plan a major purchase in the next three to six months, it may be a good idea to put unnecessary credit applications on the back burner.
- Are You Looking for a New Mortgage: If you want to purchase a new home or refinance your current home, you will need to keep your credit history stable and avoid applying for a new credit card.
- Have You Checked Your Credit Report: If neither of the above scenarios apply, you should still check your credit report before you start a credit card application. You will want to ensure that your credit is in good shape and you know your latest score before you complete an application.
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Things to Avoid When Applying for a Credit Card
If you are planning on applying for a new credit card, there are things that you need to avoid including:
- Applying for cards not appropriate to your credit
Unless you have excellent credit, you will need to tailor your card applications to your credit, only applying for appropriate cards.
This will not only save you wasted time, but you can also avoid unnecessary hard credit inquiries.
- Applying for multiple cards
If you’re unsure which credit card you want, avoid applying for multiple cards. If you do want to compare credit card deals, look for pre approved or prequalified offers, which only use a soft credit inquiry.
This will allow you to check if you qualify and what terms you’ll be offered, but you’ll only trigger a hard inquiry if you decide to proceed with the application.
- Having Inconsistent Income
Credit card issuers will review your income to make sure you have enough to manage the new card responsibly. If your income is inconsistent, you might be seen as a riskier applicant. So, if you're currently experiencing irregular income, it’s a good idea to wait before applying for a new credit card.
- Not Checking the Terms and Conditions
Finally, be sure to check the card terms and conditions before you complete an application.
You need to be happy with the fee structure and understand what is required to qualify for any introductory offer or bonus.
How a New Credit Card Can Build Your Credit Score
While we’ve covered the potential negatives of applying for a new credit card, there are several ways your new card could improve your credit score. This includes:
- Improving your credit utilization rate: Your credit utilization is your current debt expressed as a percentage of your available credit. Your new credit card will increase your available credit, so it can lower your credit utilization. Ideally, this should be kept at 30% or less.
- Establishing payment history: By consistently making on-time payments on your new credit card, you can create a positive payment history that boosts your credit score. Timely payments are a key factor in determining your credit score, so even after just six months of responsible use, you can see a noticeable improvement in your score.
- Credit Diversity: As we touched on above, a new credit card could help to diversify the types of credit products on your credit report, which can help to improve your score.
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