It’s true that applying for a credit card can have an effect on your credit score. But in most cases, the impact is minimal and temporary. Typically, an inquiry is recorded on your credit report when you apply, which may cause a slight decrease in your score. However, responsible use of a new credit card, such as making payments on time and keeping balances low, can actually help improve your credit score in the long run.
Understanding Credit Card Applications
When you apply for a credit card, it’s important to understand the process and the potential impact on your credit score. Here’s a closer look at the basics of the application process and why lenders perform hard credit checks.
What Happens During the Credit Card Application Process
Applying for a new credit card begins with you providing your personal information to the card issuer. This typically includes your name, address, Social Security number and income. The credit card issuer will then review your credit history to assess your creditworthiness.
During this process, a hard inquiry is placed on your credit report. Hard inquiries can have a minor impact on your credit score, unlike soft inquiries, which won’t affect it at all. While a single hard inquiry may cause a small decrease in your score, multiple hard inquiries in a short period can have more significant consequences.
Why Lenders Do a Hard Credit Check
Credit card issuers and other lenders perform hard credit checks to evaluate your credit risk and determine whether to approve or deny your application. A hard credit check provides a more thorough view of your credit history than a soft inquiry, allowing lenders to make informed decisions.
Factors That Impact Your Credit Score
FICO scores are used by 90 percent of lenders and creditors to make lending decisions. Below is a breakdown of how they’re calculated.
It accounts for 35 percent of your FICO Score and demonstrates the likelihood of you repaying debts on time. Lenders prefer borrowers who consistently make on-time payments, as it indicates lower risk. However, late payments, collections and bankruptcies negatively affect your credit score.
Credit Utilization Ratio
Credit utilization, which accounts for 30 percent of your FICO Score, refers to the percentage of your available credit that you’re using. It is vital to maintain a low credit utilization ratio – ideally below 30 percent – to maintain or improve your credit score. Unfortunately, a high credit utilization ratio indicates that you’re reliant on credit and may struggle to repay your debts. It could also negatively impact your credit score.
Length of Credit History
Credit age accounts for 15 percent of your FICO Score. A longer credit history generally indicates you have extensive experience managing credit responsibly. Credit bureaus consider factors like the age of your oldest account, the age of your newest account and the average age of all your accounts to determine the impact on your score.
Types of Credit Accounts
A diverse mix of credit accounts, such as credit cards, auto loans, mortgages, personal loans and student loans, can also benefit your credit score. It shows lenders and creditors you have experience managing different forms of credit. This factor comprises 10 percent of your FICO Score.
Recent Credit Inquiries
When you apply for a new credit account, a hard inquiry is made on your credit report. The impact of recent credit inquiries on your credit score is relatively small, accounting for only 10 percent of your FICO Score. However, too many hard inquiries in a short period might lower your score, as they suggest you’re seeking new credit due to financial difficulties.
Does Applying for A Credit Card Hurt Your Credit?
As mentioned above, when you apply for a credit card, the issuer usually conducts a “hard inquiry” into your credit. This can have a temporary negative impact on your credit score. However, the effect of one inquiry might be negligible, especially if you have a strong credit history.
If you want to avoid hurting your credit by applying for a credit card, consider an alternative just as the Current Build Card, a secured card that works similarly to a credit card but is capped to the money you have on your Current Spend Account. This means you will never be over your limit, and all your card payments will be on time. Since Current then reports these positive payments to credit bureaus, it is a good way to help you build or improve your credit. To learn more about this secured card or other features the mobile app Current offers, head over to their website and open a free account.
How Applying for A Credit Card Affects Your Credit
Below is a more in-depth look at how credit card applications affect your credit health.
When you apply for a credit card, the lender will perform a hard inquiry on your credit report, which can have a minor negative impact on your credit score. This effect is usually temporary and might last for a few months. However, multiple hard inquiries in a short period can compound the negative effect on your score as it may indicate to lenders that you are experiencing financial difficulties or are a higher-risk borrower.
One key factor in your credit score is your utilization rate, which is 30% of your score. When you get a new credit card, you may initially have a lower utilization rate since you will have more available credit. Keeping your credit card balances low in comparison to your credit limits will help maintain a low utilization rate, which can positively affect your credit score.
When you add a new credit card, your average age of accounts may decrease, which can negatively impact your credit score in the long run. However, over time, as your new account ages and your payment history remains positive, your credit score can improve.
Having a diverse credit mix is vital for a strong credit score. Adding a new credit card to your mix – especially if you have different types of loans like mortgages, auto loans, or student loans – can actually be beneficial in demonstrating responsible credit management.
Tips for Minimizing the Impact of Credit Card Applications
If you’re worried about the negative impact of credit card applications, here’s how to soften the blow.
Research Potential Credit Cards
Before applying for a credit card, it’s essential to research potential credit cards that suit your needs and financial habits. Compare various credit card types, like rewards, balance transfers, and low-interest cards, to ensure you select the best option for you. By knowing the eligibility requirements before applying, you can increase your chances of approval and minimize the impact on your credit score from hard inquiries.
Space Out Your Credit Card Applications
While you may need multiple credit cards for different purposes, it’s best to space out your credit card applications. Applying for several credit cards in a short period can make you seem like a higher credit risk, which could hurt your credit score. Instead, try to wait at least six months between applications to give your credit score time to recover from the effects of hard inquiries.
Look for Credit Cards with Pre-Approval Offers
When possible, consider looking for credit cards that offer pre-approval without a hard inquiry on your credit report. Pre-approval typically uses a soft inquiry and will not have the same negative impact on your credit score as a hard inquiry. Pre-approved offers can give you an idea of your likelihood of being approved for a credit card without hurting your credit score. Be mindful that pre-approval is not a guarantee of final approval.
Maintain a Healthy Credit Profile
To increase your chances of being approved for a credit card and minimize the impact on your credit score, focus on maintaining a healthy credit profile. Some ways to maintain a strong credit score include:
- Paying your bills on time
- Keeping your credit utilization low
- Maintaining a healthy mix of credit accounts
- Avoiding opening too many credit accounts in a short period
- Reviewing your credit reports regularly to spot errors
Balancing Credit Card Applications and Credit Score Maintenance
When applying for a credit card, it’s essential to understand how the process might impact your credit score. As mentioned above, A single credit card application can shave a few points off your score, but it doesn’t necessarily translate into long-term damage. Furthermore, it’s possible to maintain and even improve your credit score over time by using your card responsibly.
Start by considering the timing of your applications. Avoid applying for multiple cards in a short period, as this can signal financial stress to lenders and may lower your score. Instead, space out your applications and allow your credit score to recover in the meantime.
Once you have your new credit card, ensure that you make timely payments and keep your credit utilization rate below percent. This disciplined approach will help your credit score recover from the initial dip caused by the application. It’s equally important to monitor your credit report for accuracy and promptly address any errors to ensure a proper reflection of your credit management skills.