Does Applying for Credit Cards Hurt Your Credit Score
When used responsibly, credit cards can enhance your credit score over time. Responsible usage includes paying off your balance on time, keeping your credit utilization low, and maintaining a healthy mix of credit types.
However, many people wonder if applying for a credit card hurts your credit score. While it’s true that a new application will result in a minor drop in your credit profile, the reality is that it won’t make a significant difference in the grand scheme of things. But there are things to consider.
Does applying for credit cards hurt your credit score
Applying for a new credit card does affect your credit score, but what changes often surprises you. When you apply, the card issuer performs a hard inquiry on your credit report, typically resulting in a credit score drop of about 10 points.
While this drop is concerning, it’ll likely be temporary if you pay your bills on time. Additionally, since you’re getting access to more credit, you’d likely lower your credit utilization ratio (the amount of credit you’re using relative to the total credit you have access to), which could improve your credit score.
The best way to look at it is to consider how a new application can increase and decrease your credit score.
| Action | Impact on credit score |
| New application | Temporary decrease |
| Multiple applications in a short time | Temporary decrease and potential flag to creditors |
| Lower credit utilization ratio | Potential increase |
| Paying credit on time | Long-term positive impact |
It’s crucial to use your new credit card responsibly. The small hit you take when applying is not a big deal. But racking up large balances and missing payments can harm your score significantly. Careful and mindful use of your credit cards will help mitigate any negative impact from the application process.
How credit card applications affect your credit score
When you apply for a credit card, several factors determine how your credit score might be impacted. These include the type of inquiry made, the effect on your credit history, and changes to your credit utilization ratio.
Hard vs. soft inquiries
Credit card applications typically result in a hard inquiry on your credit report. A hard inquiry occurs when a lender checks your credit as part of the approval process. This can cause a small, temporary dip in your credit scores of 10 points.
In contrast, a soft inquiry does not impact your credit score. Soft inquiries happen, for instance, when you check your own credit or when a lender preapproves you for a card.
The effect of new credit on your credit history
Adding new credit affects your credit history since it’s a new application. As noted, it’s a small hit, so it won’t make a big difference. That said, opening multiple new accounts in a short period can signal to lenders that you are a higher credit risk.
However, responsibly managing your new credit account by making timely payments can positively influence your payment history, which is a significant factor in both the FICO and VantageScore models. Thus, the initial negative impact can be mitigated over time.
Credit utilization ratio changes
Your credit utilization ratio is one factor that determines your credit score. This ratio measures how much credit you use compared to your total credit limit. For example, if your total credit limit is $10,000, and you typically charge $2,500, your credit utilization ratio is 25%. Ideally, you want to keep that limit under 30%.
Applying for a new credit card and receiving approval raises your overall credit limit, which can decrease your credit utilization ratio if your spending doesn’t increase proportionately. This can have a positive impact on your credit scores, but it doesn’t happen right away. This is why a new application temporarily lowers your credit score, but it will recover over time.
Factors that affect your credit score
Your credit score is influenced by several key factors. Understanding these elements can help you manage and improve your credit profile effectively.
Payment history
Payment history is the most significant factor affecting your credit score, accounting for 35%. Regular on-time payments signal reliability and can significantly boost your score.
Conversely, missed or late payments can adversely impact your score. Generally, when you have two missed payments in a row, your credit score will see a huge drop. Additionally, the interest rate on your credit card will likely increase.
Credit utilization ratio
Your credit utilization ratio is another significant component. This ratio represents how much credit you’re using relative to the total amount you have available. As mentioned, you want to keep your credit utilization ratio under 30%.
Paying down balances or asking for higher credit limits helps manage this factor effectively.
Length of credit history
How long you’ve had access to credit is another way lenders can check how responsible you are with credit. Someone who’s had access to credit for years and has used it responsibly will likely have a better credit score than someone new to credit.
In an ideal world, you’ll keep your oldest credit card open since it’ll help with your length of history. That said, if you have multiple cards and the others have been active for years, cancelling your oldest account may not matter.
Recent inquiries
When you apply for new credit, lenders perform a hard inquiry on your credit report. While a single inquiry might result in a minor drop in your score, multiple inquiries within a short period can have a more noticeable impact.
One or two applications a year won’t raise any flags. However, if you’re applying for five cards in a short period, lenders will likely question why you’re seeking so much credit.
Types of credit
Having a mix of different types of credit can benefit your credit score. This could include credit cards, mortgages, auto loans, and wireless services.
Lenders like to see that you can manage various types of credit responsibly. A diverse credit mix contributes 10% to your credit score calculation. However, it’s not necessary to have every type of credit. Focus on maintaining good standing accounts and only get different types of credit if you need them.
Strategies to minimize negative impacts
Managing credit card applications effectively can help you minimize potential negative effects on your credit score. This section outlines some strategies, including timing your applications strategically, exploring soft inquiries and pre-approval options, and evaluating card offers and credit limits.
Timing applications strategically
Limit your applications to one card every few months. Frequent applications can result in multiple hard inquiries, decreasing your score. Plan applications around periods when you won’t be borrowing heavily, as this will reduce the hit on your credit utilization ratio.
Exploring soft inquiries and pre-approval
Many credit card issuers offer pre-approval options that use soft inquiries. These inquiries do not affect your credit score. Taking advantage of these can give you an idea of your approval odds without a hard inquiry.
Look for pre-approval online through your bank or credit card issuer. Although pre-approval does not guarantee approval, it can help you find attractive credit card offers without impacting your credit score. Use these options to apply selectively and avoid unnecessary hard inquiries.
Evaluating card offers and credit limits
When considering new credit cards, evaluate the offers and credit limits carefully. High credit limits can decrease your credit utilization ratio. Choose cards that offer limits which align with your spending and repayment ability.
Occasionally, credit cards offer really good welcome bonuses. These sign-up bonuses are usually worth a few hundred dollars, so taking the credit hit via a new application is usually worth it.
How often should I apply for a new credit card?
Generally, applying for one or two new credit cards each year won’t significantly affect your credit score. That said, it’s worth considering the following before submitting an application:
- Short-term Impact: Each new application results in a hard inquiry on your credit report, which can lower your score by about ten points.
- Long-term strategy: Space out your applications. Applying for a new credit card every six months to a year can help you build credit without too many hard inquiries.
- Financial goals: Align your applications with your financial goals. For example, apply when building credit, consolidating debt, or taking advantage of special offers.
- Credit utilization: Maintain a low credit utilization ratio. Having too many cards can lead to a higher utilization rate, which can negatively affect your score.
- Account management: Ensure you can responsibly manage multiple accounts. Late payments or high balances can hurt your score more than a hard inquiry.
- Consider your credit history: People with newer credit profiles should be more cautious, while those with established credit can afford to apply more frequently.
- Sign-up bonuses: If a sign-up bonus is very attractive and aligns with your spending habits, it might be worth the small dip in your credit score.
By considering these factors, you can make informed decisions on how often to apply for a new credit card without harming your credit score too much.
Final thoughts
Applying for a credit card will have an immediate impact on your credit score, but it’s temporary. Generally, if you pay your bills on time and in full, your credit score will increase back to where it was after a few months.
