When you apply for a new credit card, you could see a slight decrease in your credit score. That’s because the credit card issuer runs a hard inquiry on your credit reports when deciding whether to approve your application, and hard inquiries can cause a temporary dip in your score.
However, actually being approved for and opening a new credit card could improve your credit score, both immediately and over time if you use it responsibly. Overall, if you understand a credit card and think it would be useful, the negative credit impacts shouldn’t stop you from applying. Here’s a closer look at how adding a new credit card to your wallet can impact your credit score.
Key Takeaways
- Applying for a new credit card will trigger a hard credit inquiry, which could cause your credit score to drop by a few points.
- Pre-qualifying for a credit card can help you determine your chances of approval without impacting your credit.
- Opening a new credit card can lower your credit utilization ratio, which could improve your credit score significantly.
- Making on-time payments and using your credit card responsibly can build up your credit over time.
How Applying for a Credit Card Affects Your Credit Score
Applying for a new credit card—whether you’re approved or not—can cause a temporary dip in your credit score. When you submit your application, the credit card issuer will run a hard inquiry on your credit reports to understand how you’ve used credit in the past. A hard inquiry can ding your score slightly—typically by five points or less.
This hard inquiry can stay on your credit reports for two years. However, it’ll only impact your FICO score for one year, and the impact will lessen as time goes on. Hard inquiries aren’t anything to be afraid of, as long as you don’t apply for a lot of different credit accounts. If you pay your bills on time and practice other positive credit behavior, you could see your score bounce back within a few months.
Pre-qualifying for a credit card gives you a way to see if you’re likely to be approved, with no impact on your credit score. Just keep in mind that a pre-qualification is not a guarantee of approval.
How a New Credit Card Can Hurt Your Credit Score
If you’re approved for a new credit card, it can hurt your credit score in a few ways (aside from the hard inquiry from the application).
More New Credit on Your Credit Reports
Adding new credit to your credit reports can hurt your score. The “new credit” category makes up 10% of your FICO score, as research shows a connection between credit risk and opening up several accounts in a short period of time. However, the negative impact of new credit accounts is greater for consumers with a shorter credit history, so it may not have as much of an impact if you’ve been building your credit history for many years. Either way, this category accounts for a relatively small percentage of your credit score.
The Average Length of Your Credit History Will Decrease
The length of your credit history accounts for 15% of your FICO score, and includes the ages of your oldest and newest credit accounts, as well as the average age of all accounts. When you open a new credit card, it becomes your newest account and it brings down the average age of your accounts, which could cause your credit score to drop. The impact will be greater if you’re new to credit and less significant if you already have a lengthy credit history.
To improve the length of your credit history, continue using credit well over time and avoid closing old accounts that are in good standing, unless you no longer use them and they have monthly or annual fees.
Increased Debt Can Cause Missed Payments
A final factor worth considering is how opening a new credit card will impact your spending habits. If you tend to use your credit cards a lot, maxing them out and/or carrying a balance from month to month, a new card could lead to increased debt as that balance grows.
With more debt, you may find it more difficult to pay your bills on time. If you miss payments, your credit score can suffer quite a bit. Instead, try to stick to a budget and don’t increase your spending with the increased credit.
How a New Credit Card Can Help Your Credit Score
The impact of a new credit card on your credit score isn’t all bad. In fact, a new credit card can have a net positive impact on your credit score right off the bat and over time if you use it responsibly.
Your Credit Utilization Could Decrease
If you open a new credit card and don’t increase your monthly credit card spending, the newly available credit will decrease your credit utilization ratio—the amount of credit card debt you have compared to your total available balances.
For example, say you’re carrying a credit card balance of $1,000 and have a credit limit of $2,000. In this case, your credit utilization ratio is 50%. But if you open a new card that also has a credit limit of $2,000, your credit utilization ratio decreases to 25% ($1,000 out of a total limit of $4,000).
Your credit utilization ratio accounts for 30% of your FICO credit score, making it the second largest factor, so a large reduction in this ratio could boost your score quite a bit.
Financial experts recommend keeping your credit utilization ratio low, though there’s no set rule about the best ratio. Experian recommends a credit utilization ratio of no more than 30%. FICO says that threshold isn’t as cut-and-dried as it’s often made out to be, and instead recommends keeping it as low as possible—below 10% if you can.
A credit utilization ratio of 0% could indicate that you’re not using your credit cards at all. You can still have excellent credit with unused credit cards, but if you’re trying to build credit it’s generally a good practice to use your cards and aim to pay off the statement balance in full each month.
On-Time Payment History Can Improve Your Score
Your payment history is the most important factor in your FICO score, making up 35%. Lenders want to see that you pay your bills on time. Late payments can drag down your score, while on-time payments will build it up over time.
By making consistent on-time payments on your new credit card—and any other cards or loans—you should see your credit score go up, all other things being equal.
Your Credit Mix Will Improve
Opening a credit card could also improve your credit mix, especially if you don’t have any other credit cards on your credit reports. Showing you can manage diverse financial products, like credit cards, personal loans, and mortgages, can boost your score and signal responsible credit management to lenders. If you already have several credit cards, adding a new one may not improve your credit mix, but it won’t hurt it either. Credit mix makes up 10% of your FICO score, so a lack of variety in your credit reports won’t hurt you too much.
Frequently Asked Questions (FAQs)
How Often Can I Apply for a Credit Card Without Hurting My Credit?
It may be wise to wait six months between applying for credit cards to avoid hurting your credit. Racking up multiple hard inquiries in a short amount of time can be a red flag to lenders and harm your credit score. In addition, card issuers may have their own rules about how often you can apply for new credit cards, so check the fine print.
Does Being Denied a Credit Card Damage Your Credit Score?
Being denied a credit card won’t directly damage your credit score. However, as part of assessing your application, the lender will likely have run a hard inquiry, which could ding your score by up to five points. This happens whenever you apply, whether you’re approved or denied, but pre-qualification has no impact on your credit score.
Is It a Good Idea to Get a Credit Card and Never Use It?
Getting a credit card and never using it can reduce your credit utilization and improve your score, but it could also cause the issuer to close your account due to inactivity. Then you would have a hard inquiry from the application, which can have a slight negative effect, with nothing to show for it. And, closing an old account (or having it closed for inactivity) can decrease the average age of your accounts and increase your credit utilization ratio, both of which could harm your credit score. Some cards have annual fees, as well, which aren’t worth paying for a card you never use.
Is It Better to Close a Credit Card or Keep It Open and Not Use It?
It’s generally a good idea to keep old credit card accounts open, since you should avoid shortening the length of your credit history for no reason. If the card has an annual fee and you don’t plan to use it, however, it makes sense to close it. Or, you can ask the card issuer about downgrading to a version with no annual fee. You may need to use a card every once in a while to avoid an automatic closure due to inactivity.
How Many Credit Cards Should I Have?
Having at least one credit card can improve your credit mix and help you build your credit score over time as you make on-time payments. Multiple cards may be beneficial if you can maximize rewards programs and stay on top of your bills, but avoid opening more credit card accounts than you can keep track of or use regularly. Keep in mind that many hard inquiries and more new credit accounts can bring your score down. That said, it’s usually not a good idea to close old cards unless they have annual fees, and simply having more credit cards will not hurt your credit score—just be sure to use them responsibly.
The Bottom Line
Before opening a new credit card, consider the impact that applying will have on your credit score. If you’re looking to take out a car loan or mortgage in the near future, you might want to wait on the credit card application to avoid triggering a hard inquiry and dinging your score even slightly, so you can get the best rate possible.
If that’s not an issue and you would truly benefit from using the card, don’t worry about the hard inquiry—just concern yourself with making on-time payments and maintaining a low credit utilization ratio. If you tend to use a lot of your available credit each month, consider paying the balance down before the end of the statement period to reduce your reported utilization. Avoid applying for too many credit cards in a short time, and don’t use a new card to spend more than you can pay off.
If possible, it’s worth pre-qualifying with various credit card issuers to check your chances of approval without impacting your credit score. Read over the fine print to familiarize yourself with interest rates, fees, and rewards.
If you’re looking for a new card, start with our recommendations for the best credit cards.
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