Thinking of increasing your purchasing power with credit? You may wonder whether applying for a credit card affects your credit score. Requesting a new a credit card will, indeed, affect your credit report.
In this article, you will find out how and why applying for a credit card affects your credit score and get a few tips to make the best use of your credit cards while keeping a good credit score.
How and why does applying for a credit card influence your credit score?
When you self-check your credit reports with TransUnion or Equifax, or receive a promotional credit card offer, a soft inquiry is placed on your credit report. In other words, a soft inquiry takes place when your credit report is checked for informational purposes.
A hard check occurs when a lender or company sends a request to review your credit report as part of a loan application. When you apply for a new credit card, a hard inquiry gets recorded on your credit report. This usually affects your credit score.
On the other hand, a soft inquiry does not appear on the credit reports sent to lenders and won’t affect your credit score. Soft inquiries are visible only to you and will stay so for 12 to 24 months.
Most hard checks remain on your credit reports for three years as long as your report has more than five inquiries.
This practice is in place because recent inquiries on your credit report show a lender that you are searching for new credit. Depending on your credit history, lenders may interpret your hard inquiries differently.
In other words, lenders use hard inquiries, along with multiple other variables, to assess a customer’s financial situation. For example, someone who applies for tens of credit card within a short period might raise red flags. Someone getting multiple hard inquiries within a short span might be perceived as having financial troubles. If that person also has a poor credit card history, their application will likely be rejected.
Not all loans affect your score in the same way
Besides credit card applications, a hard inquiry may be applied to your credit score when applying for a personal loan, mortgage, car loan, or apartment rental, among others. Not all loan applications will be counted as unique inquiries.
For example, suppose you are searching for a mortgage loan. In that case, multiple inquiries for the same purpose within a given time frame (usually 14 to 45 days) will usually count as a single inquiry.
The impact of applying for a new credit card on your overall ability to make loan payments depends on your circumstances.
For example, a drop of 5 to 10 points should not make a big difference if you have a good credit score. Furthermore, when you make your payments on time, your credit score will return to its previous levels in a short period.
If your credit card is approved, your credit score could also increase. For instance, a new credit card will lower your credit card utilization ratio, also known as debt-to-credit rate.
Keep your credit utilization ratio under 30%
A credit card utilization ratio is the ratio of your total credit to your total debt. It is typically represented as a percentage. If your credit utilization ratio is 20%, it means that you are currently using 20% of the available credit.
In other words, if you have a lower credit card utilization ratio, it means you have a higher amount of credit available to spend. You should do your best to have a credit card utilization rate of 35% or less, preferably 30% or less.
When handling different types of credit, the credit score improves as long as each type of credit is handled properly. For this reason, your first credit card and other types of financing, such as personal loans and lines of credit, will improve your credit score. It improves because your credit mix will increase.
A new credit card will increase the length of your credit history. Credit card history is of paramount importance to your credit card score. If you use the new credit card is used correctly, it could have a significant positive impact on your credit score over time.
Finally, getting approved will lower the average credit age. This will have a slightly negative effect on your credit score that will not last long. That is provided you keep the card in good standing for enough time.
Tips to keep a good credit score
Credit scores in Canada range between 300 and 900. A good credit score is between 660 to 724, a very good credit score is between 725 and 759, and an excellent credit score is 760 and above.
Whether you want to apply for new credit right now or not, it’s highly advisable to keep a good credit score so that you have a good chance of accessing the loan you need.
It is best practice to do your best to keep a credit score of at least 660. In addition, try to keep your credit utilization under 30% and pay your credit card bills on time. If possible, pay more than the minimum monthly payment.
One should not forget that self-checking your credit score will not lead to a hard inquiry. Checking your credit report from time to time is advisable because mistakes and fraud can negatively impact your credit score. If you detect any errors or fraud, make sure to dispute them.
How times is a credit score’s friend
It’s also recommended to avoid canceling a credit card unless strictly necessary, especially your older credit cards. Keeping old credit cards can show a bank you are consistent with your financial decisions. It signals that you are less likely to be unable to fulfill your payment obligations.
You should give time for your credit score to recover following a credit card application. This is especially true if you know you will soon apply for a large loan such as a mortgage. By avoiding multiple successive credit card applications, you will have fewer hard inquiries on your report. This way your chances of getting a good loan increase.
Last but not least, do your best to avoid sending credit card applications that you suspect are likely to be declined. When searching for a new credit card, check the minimum credit score requirement, thresholds, minimum income, and other eligibility criteria.
Bottom line: you should apply for a new credit card only when necessary
Having multiple credit cards is, at times, necessary. What if you have a good credit score and you will not make too many applications within a short time frame? Then applying for a new credit card will not significantly impact your ability to make future loans.
Of course, with more spending power comes more responsibility. Having multiple credit cards increases the risk of going over budget or doing other things that could negatively affect your ability to qualify for a loan when needed.
Rebuilding your credit score is not an easy task. As such, it is advisable to do your best to keep a credit score of at least 660. Strategies to improve your credit score include:
- Keeping your credit utilization under 30%
- Paying your credit card bill on time
- Not canceling a credit card unless strictly necessary.
Frequently asked questions about credit cards and credit score
Yes, applying for a credit card can lower your credit scores. However, applying for a credit card once will only have a limited impact on your score. Multiple credit card applications within a short period will lower your score more drastically and make it more likely you will be seen as a riskier borrower.
Yes, closing a credit card can hurt your credit score. Creditors like to see a lower credit card utilization ratio, that is, a higher amount of credit available to spend. To close a credit card without harming your credit score, you should make sure to fully pay all your card balances (and not only the one you want to cancel)
Generally speaking, most credit bureaus will consider 660 and up as a decent credit score. However, different types of credit cards have different score requirements.
Yes, you can have a credit score without a credit card. For example, you have a credit score if you have a mortgage, a car loan, and/or a student loan.
Getting declined for a credit card doesn’t hurt your credit score directly. However, applying for a new credit card lowers your credit score because a hard inquiry is applied to your score, regardless of whether the application is approved or not.
Yes, having multiple credit cards can positively affect your credit score, as it can lower your credit card utilization ratio, as long as you maintain about the same amount of spending as before you open a new credit card.
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