Considering your credit score’s importance to your financial life, you may want to protect it. Knowledge is one of the best ways to understand how to maintain a good credit score. Understanding how credit scores are calculated and what affects them is crucial. For example, what happens when you apply for loans or credit products? More specifically, does applying for a credit card affect your credit score?
Key Points
- Applying for a new credit card may affect your credit score, though only temporarily.
- Your score may be impacted when creditors pull your credit report to assess your creditworthiness.
- Multiple new credit card applications could have a more significant effect on your credit score, especially if you apply within a short time frame.
Does Applying For A Credit Card Affect My Credit Scores?
Each time you apply for a new credit account, the creditor will request to review your credit report. When that request is made, it is recorded on your credit report, either as a hard inquiry or a soft inquiry.
Hard Inquiries
A ‘hard inquiry’ or ‘hard pull’ occurs when you apply for a financial product or service and have given the creditor permission to see your credit file. A single inquiry may have a small effect on your credit score, though it’s usually only temporary.
One hard pull isn’t typically a big deal. But if you experience several hard pulls within a short period, your credit score may be reduced significantly and lenders may worry that you’re living beyond your means.
Soft Inquiries
A ‘soft pull’ or ‘soft inquiry’ does not require your permission. Often, soft inquiries come from sources other than lenders who are doing background checks. These might include potential employers, insurance brokers, car rental companies, and even yourself.
Credit card companies may also review your files when offering new cards or increased credit limits. Soft inquiries won’t be seen by most lenders and won’t affect your credit scores.
Will Opening A New Credit Card Hurt My Scores?
Applying for a new credit card could hurt your credit score in several ways, including the following:
- Credit Inquiry – When you apply for a new credit card, your creditor will pull your credit report, which will result in a hard inquiry. This, in turn, may negatively impact your credit.
- Credit Account Age – A new credit card account can lower the average age of your accounts, especially if you close an older account first.
- Debt-To-Credit Ratio – If you open a new credit card account with a lower credit limit, your debt-to-credit ratio may increase, especially if you don’t reduce your balance. However, if you take out a new credit card with a higher credit limit, your debt-to-credit ratio may decrease, which can positively impact your credit.
Will My Credit Score Be Affected If I Check My Credit?
When you request your own credit report, it is considered a soft pull and will not affect your credit score. You can pull your credit report for your own viewing if you want to check your credit score or review the information on your credit report.
Every time you check your credit, it will appear on your credit report as a soft inquiry and will not affect your credit scores. This information will only be visible to you and not to your creditors.
Multiple Credit Inquiries And Credit Scores
Hard inquiries on certain credit products, like mortgages or auto loans, work differently than when you apply for a credit card or personal loan.
Multiple Inquiries For Mortgages
With mortgages, multiple hard inquiries within a short period (usually 14 to 45 days) are considered as a single inquiry. The exact time frame depends on the credit scoring model used by the lender to calculate your credit scores.
Do note, that each hard inquiry made will show up on your credit report; however, the impact it has on your credit will be equal to a single inquiry. This exception allows borrowers to apply with various lenders to find the best mortgage without fear of their credit being hurt.
Multiple Credit Inquiries For Other Credit Products
Multiple hard inquiries for other credit products like credit cards or personal loans don’t have the same exception as mortgages. Each hard inquiry will be counted. If you have several hard pulls on your credit report within a short period, this may have a compounding impact on your credit score, as these inquiries can shave off a few points each.
This can also lead lenders to think you’re in financial trouble if you’re applying for several loans. In turn, this may prevent you from getting the money you need.
| What Are Credit Scores? A credit score is a three-digit number used by lenders, creditors, insurance providers, landlords, and even employers. In Canada, credit scores range from 300 to 900. The higher your score, the better. Each credit score range can be classified as follows: – Excellent (Scores 760+) – Very Good (Scores 725 – 759) – Good (Scores 660 – 724) – Fair (Scored 560 – 659) – Poor (Scores 300 – 559) |
How Else Can Your Credit Card Affect Your Credit Score?
Your credit score can be affected by more than your credit card application. It may also be affected by the following factors:
- Payment History (~35%). Are you paying your credit card bills on time? Missed or past due payments can negatively affect your credit score, especially since your payment history often carries the most in your credit score calculation.
- Debt-to-Credit Ratio (~30%). Many credit scoring models consider how much of your credit limit you have available. Using 30% of your credit card limit is generally recommended to help avoid negative effects on your credit scores.
- Account History (~15%). How old are your credit card accounts? Do you have a mix of older and newer credit accounts in your file? Scoring models typically consider the average age of all your credit accounts. As such, keeping your current credit card accounts open and avoiding too many new credit accounts can help positively impact your credit.
- Number of Inquiries (~10%). How often are you applying for new credit products? When a lender or creditor pulls your credit as part of an application for new credit, a hard inquiry may be noted on your credit report. This can affect the calculation of your credit score.
- Public Records (~10%). If you default on your credit card payments, your creditor may sell your debt to a collection agency. Public records like these are typically recorded on your credit report which may negatively impact your credit scores.
When Is It A Good Idea To Apply For A New Credit Card?
While applying for a new credit card can have a negative effect on your credit score, there are times when it’s worth the additional credit inquiry:
You Want A Low-Rate Balance Transfer Card
If you’re currently carrying a lot of high-interest credit card debt, you want to look into taking out a balance transfer card offering a low-rate or a 0%-interest promotional period. During this period, it may be much easier to pay down your debt without accruing additional interest.
You’re Looking For A Card With A Travel Insurance Package
If you’re an avid traveller, you’ll want to ensure you’re covered while abroad in case the unexpected happens. Travel insurance can be costly, but some credit cards come with a comprehensive travel insurance package. You can use your credit card to book your trip and use its in-depth insurance coverage to keep you protected.
You Want To Take Advantage Of A Better Rewards Program
Many credit cards offer rewards programs that let you earn points with every expenditure you make. However, each card offers its own earnings rate for different purchases. While some cards may offer more points for each dollar spent in one category, others may offer higher rates in another.
If you spend a lot of money booking travel, for example, a credit card that offers a high earnings rate for travel expenditures may be worth it. On the other hand, if you want to focus on earning points when you shop at specific grocery stores, you’ll want to look for a credit card that aligns with these spending habits.
Can Having A Credit Card Improve My Credit Score?
While your score may temporarily dip when you first apply, a credit card can actually be a good thing for your credit score.
- Timely payments. If you pay your credit card bill on time every billing cycle, your credit score may improve. Further, making more than the minimum payment amount (ideally the full balance amount) can have an even bigger impact on your credit score.
- Low credit utilization ratio. If you keep your credit card expenditures to no more than 30% of your credit limit, you can help increase your credit score over time.
- Credit mix. Having a variety of credit products in your portfolio can contribute to a positive credit profile. Adding a credit card to the mix may be a good way to diversify your credit and loan accounts.
Bottom Line
Don’t stress if your credit score decreases slightly after applying for a new credit card, it’s just a temporary dip. However, you want to avoid applying for too many cards within a short period, this could have a much more pronounced effect on your score.
