Applying for credit cards isn’t something you should take lightly because it absolutely can hurt your credit score. One credit card application can ding your score by just a few points, but multiple applications could raise red flags for lenders and drag down your credit score accordingly.
Still, while applying for a credit card can hurt your credit, there are a number of potential pluses to credit cards, from allowing you to build your credit history to earning rewards. Here’s how to navigate the effects of applying for credit on your credit score.
How Applying for Credit Cards Can Hurt Your Score
While you won’t take a big hit when you apply for a credit card, you will get dinged. Why? When you apply for a credit card, the card issuer will pull your credit in what’s called a hard inquiry because they are seeking information in order to determine whether you are a good candidate to lend money to.
Hard pulls stay on your credit report for two years, though their impact on your credit scores typically vanishes after a year. In contrast, soft inquiries don’t affect your credit score no matter how often they occur because they aren’t requests for new credit, just information. A soft credit inquiry may happen when you check your credit report, for example.
The reason that hard inquiries can lower your credit score is because a new application can represent more risk for the card issuer. The uncertainty that applying for new credit adds can be compounded if you have just a few accounts or not much in the way of credit history.
That being said, new credit is among the factors that impact your FICO® score, so the drop isn’t necessarily a reason to forgo credit applications entirely. Just make sure to proceed thoughtfully when weighing the decision of whether to apply for a credit card.
Should You Apply for Multiple Credit Cards at Once?
Simply put, no. This is a bad idea. It might make sense to apply for more than one job at a time, but that’s not the way to go with credit cards. You should pursue credit cards strategically.
By applying for several cards over a short period, you might send the signal that you’re desperately seeking funds and headed for — or already in — trouble. You’ll appear risky to lenders and that will likely be reflected by a dip in your credit score.
Of course, this doesn’t mean you can’t have more than one credit card. You’ll just want to take your time and space out your acquisitions. If you get rejected for a card, pause to figure out why and then take steps to address the suspected weak spots. Once you’ve had time to improve your credit, consider trying again.
Can Applying for Credit Cards Help Your Score?
There are two sides to a coin and so it goes with applying for credit cards — there is some upside.
If you open a new account, this could lower your credit utilization ratio, which is your outstanding balances compared to your overall credit limit. This accounts for 30% of your score and is second in importance only to your payment history.
Another potential plus is that if you make payments on your new credit card on time, your positive payment history can improve your score over time. However, if you’re a credit card newbie, you may not see the uptick in your score as quickly. This is because FICO requires you to have at least one account that’s been open for six months and one account that’s been reported to the credit bureau within the last six months to qualify for a credit score.
If you don’t already have a handful of credit card accounts, a new card also can boost your score because it’s adding another revolving account. While it only accounts for 10% of your credit score, credit scoring models do look at your mix of account types.
Things to Consider Before Applying
Before you rush to apply for credit, make sure you’re ready. Here’s what to consider doing prior to applying.
Check your credit report: The first step is to get a copy of your credit report. Until April 20, 2022, you can get free weekly credit reports from the three national credit reporting agencies, Equifax, Experian and TransUnion. To get your free reports, go to AnnualCreditReport.com . As you review your credit report, check for any errors in your report. If there are any, take steps to fix them before you approach a credit card issuer. Also check to see if you’ve had any other recent hard inquiries.
Consider any other upcoming credit applications: Be mindful about what’s on your horizon before you move forward with applying for a new credit card. For example, if you think that you will be applying for a mortgage or car loan soon, you may not want to apply for a card and rack up multiple inquiries at once. It may make sense to get your mortgage or car loan first and wait for a little while to go after the credit card.
Don’t plan to ditch your old cards: Just because you hope to get a new card, don’t start canceling the other cards in your wallet. Remember, length of credit history makes up 15% of your credit score. You’ll also reduce your total available credit by canceling a card, which could drive up your credit utilization ratio if you have hefty balances on other cards.
Think about why you want to apply for a credit card: Lastly, have a little talk with yourself. A credit card rule of thumb is just because you can get a credit card doesn’t mean you need one. If you already have a credit card, what’s driving you to apply? How are you managing your existing credit card? If you’re not 100% sure you’ll be able to pay off the balance in full each month, think twice about getting it. When balances linger from month to month, it becomes costly due to interest racking up.
Applying for a credit card may be a simple process in terms of filling out the forms, but that doesn’t mean it’s something to take lightly. It can have very real effects on your credit score, and thus is always something to be considered carefully and done responsibly.
When it comes to money management, you don’t have to go it alone. Take advantage of online tools like SoFi Relay that can help you track spending, monitor your credit, get financial insights and more.
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