Does Applying for a Credit Card Affect Your Credit Score?

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Does applying for a credit card affect your credit score? The short answer is yes, but if you have a decent credit score, it really won’t matter. To be perfectly blunt, if you have a good to excellent credit score, applying for additional credit cards shouldn’t be a major concern. For reference, I average six new credit card applications every year, and I haven’t noticed a significant impact on my credit score.

That said, some people are concerned that having multiple credit cards will encourage them to spend which is a valid point. It’s also not a good idea to apply for multiple cards if you plan on getting a mortgage or major loan in the near future. Knowing how your credit score is affected when applying for a credit score will help you decide if getting that new card is worth it.

What is a credit score?

In case you didn’t know, your credit score shows how creditworthy you are. Your score is a number that falls between 300 and 900. The higher your credit score is, the more creditworthy you are.

Very Good

For those who have a credit score below 660, there’s a good chance that you’ll be denied if you’re seeking additional credit. Ironically, when used responsibly, a credit card will help you improve your credit score. If you find yourself being denied whenever you apply for a new credit card, you may want to take steps to improve your credit score. Once you’ve rebuilt your credit, you can apply for a traditional credit card.

Generally speaking, anything above 660 is good, but you should aim for a number over 750 as you likely won’t have any issues securing additional credit if you need it.

Hard vs. soft credit inquiries

When applying for any type of credit, including credit cards, a hard inquiry is requested against your credit history which results in a drop in your credit score. In the past, Equifax stated that it was a drop of 10 points, but they’ve recently changed their language so it says a “few” points. In my personal experience, my credit score drops 5 – 10 points when I apply for a new credit card.

Many people freak out about this point drop and think it’ll hurt them, but overall, it doesn’t matter much. Yes, your credit score will go down, but if you make your payments on time, it’ll go back up after a few months. In other words, applying for another credit card probably won’t be a big deal in the grand scheme of things as long as you pay your bills on time.

Soft inquiries are also performed by banks, but it’s usually used just to qualify people. For example, financial institutions will often perform soft inquiries to figure out who they should target as part of their next marketing campaigns. If you have a good credit score, they may send you an email saying you may qualify for a new credit card or a line of credit.

When banks do a soft check, all they’re really doing is looking at your credit score. When it comes to actually applying for a product, they’ll likely perform a hard check as final due diligence.

Some people assume that a credit check isn’t required when they’re pre-approved for a credit product, but that’s not always the case. There’s always a chance that the lender will do a final hard check before approving you.

Applying for multiple credit cards

Does applying for a credit card affect your credit score is usually asked by people who are interested in churning credit cards. Obviously, the hard inquiries have an immediate impact on your credit score. Applying for multiple cards can also have some unintended consequences as many providers are clamping down on people who have been abusing bonuses.

Regardless of your intentions, applying for multiple cards in a short period of time will appear as if you’re trying to access money fast. This can hurt you if you plan on applying for a mortgage or a line of credit in the near future. Lenders will look at your activity and wonder why you’re trying to access so much credit. It’s a serious flag and it’s enough for them to reject your application.

It’s perfectly fine to apply for a few new credit cards a year, but I really wouldn’t recommend applying for multiple cards in a short period of time. I like to spread my applications apart by at least two months to give myself time to rebuild my credit score. That said, whenever the best credit cards in Canada have a good promotion, I’ll sign up regardless of when I last applied for a card.

Credit utilization

Another consideration when applying for new credit cards is your credit utilization ratio. Credit utilization is the amount of credit you’re using relative to what you have access to. 

Let’s say you have a credit limit of $5,000, and you currently have a balance of $4,000, that’s an 80% utilization ratio which is quite high. If you applied for another credit card and are approved with a limit of $5,000, your utilization ratio would drop right away to 40%.

This is relevant because your utilization ratio is one of the factors used to determine your credit score. It’s pretty common for people to cancel credit cards they no longer use, but keep in mind that this will actually increase your credit utilization ratio.

Keeping an older credit card active can also benefit you since your credit length is another factor when determining your credit score. Generally speaking, I recommend keeping your credit utilization ratio below 30%, but I have no idea if that makes a difference to Equifax and Transunion.

Final thoughts

So does applying for a credit card affect your credit score? Yes! Anytime you apply for credit, you take a hard hit on your credit score. While the drop in your credit score is something worth considering, it will go back up over time so it’s not a big deal. Whether you’re looking to get a backup card, or

About Barry Choi

Barry Choi is a Toronto-based personal finance and travel expert who frequently makes media appearances. His blog Money We Have is one of Canada’s most trusted sources when it comes to money and travel. You can find him on Twitter:@barrychoi

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