Does Opening a Credit Card Hurt Your Credit?
Key points about: how opening a credit card affects credit score
A new credit card could hurt your credit score since a credit card company runs a hard inquiry during the review process.
New credit accounts might reduce the average age of credit on your credit report, which may hurt the credit score.
With responsible use, a new credit card can be used to build credit history overtime and help credit scores.
Opening a new credit card account can impact your credit score in several ways. At first, a new hard inquiry could impact your credit score. But, over time, with responsible use, the new credit account could help you build credit history, improve your credit utilization ratio, and positively affect your credit score.
Does opening a new credit card hurt your credit?
Opening new credit accounts can hurt credit score in two main ways:
- The credit card issuer could pull your credit report as part of their review process. This kind of inquiry on your credit report can negatively affect your score, though it generally has a small impact on your FICO® Score (Fair Isaac Corporation).1 According to FICO, 10% of your credit score is based on new credit accounts, and opening multiple credit card accounts too quickly could hurt your credit score.
- Card issuers report newly opened accounts to the credit bureaus. New accounts can impact length of credit history, though the exact impact depends on the applicant’s unique credit history.
While over time, with responsible use, getting a credit card can help build a better credit history, it’s helpful to keep in mind that opening a new credit card could hurt your credit score, at least initially.
Other ways opening new credit cards can hurt credit score
There are a few other ways opening new credit card accounts could negatively impact credit score:
Opening multiple credit cards at once
Applying for several new credit cards could be seen as a sign of riskier spending. Opening several new lines of credit quickly could cause a drop in your credit score.
More credit card debt
If having a new credit card account leads to more debt or exceeding your credit limit, your credit score could suffer. Plus, if having too many accounts causes you to make late payments, that could hurt your credit score, too.
Average age of accounts
Opening a new credit card might reduce the average age of your accounts, especially if you only have a few credit cards and they’ve been open for a long time. Since length of credit history makes up about 15% of your credit score, be mindful when opening new accounts.
Mix of credit
Another way a new credit card can hurt your credit score is if you use a balance transfer offer to transfer the balance of a loan to your new credit card. This can increase your debt-to-credit ratio and reduce your mix of credit.
Additional factors that may negatively impact credit score
Although opening a credit card may affect your credit score temporarily, other factors can also contribute to a low credit score. Here are a few examples:
High credit card balances
If you recently made large purchases and only paid the minimum due on your credit card bill, this can hurt your debt-to-credit ratio and your credit score.
If you missed a payment on one of your cards or paid your mortgage late, you could see a significant drop in your credit score.
Recently closed accounts
Like opening a new credit card decreases the average age of your accounts, closing an older account could also lower the average age of accounts. If a card you don’t use has no annual fee, it may be more helpful to keep the account open and use it often enough so the issuer doesn’t close the account.
Does pre-approval for a credit card lower your credit score?
Whether you get a pre-approval offer or fill out a form for pre-approval, your credit score is usually not affected since pre-approval uses what’s known as a soft inquiry, which doesn’t affect your credit score. This means the card issuer checks your credit history but doesn’t complete a hard inquiry until you formally apply.
Can opening a credit card help your credit score?
With responsible use new credit accounts can help build a good credit history over time.
For example, credit score is made up of a few components. According to FICO.com, five factors affect credit score: payment history, amounts owed, length of credit history, new credit, and credit mix.
Amounts owed typically make up 30% of your FICO® Score. This component addresses your debt-to-credit ratio or credit utilization rate. This is a measure of how much of your credit limit is being used and paid off. Experian recommends keeping a low credit utilization rate, at no more than 30% and ideally below 10%, because it shows that you can handle credit responsibly.
Did you know?
Opening a new credit card account may lower your debt-to-credit ratio. For example, a new credit card could double your total available credit from $5,000 to $10,000. If you spread out your current spending of about $1,000 per month across the two credit cards, you could reduce your utilization ratio since you’re spending $1,000 out of $10,000 (10% credit utilization) instead of $1,000 out of $5,000 (20% credit utilization).
Whenever possible, you should try not to use all your available credit. It’s important to use credit responsibly and only charge what you can afford. If a higher credit limit tempts you to spend more than you can pay back, it could ultimately hurt your credit score.
Open new credit accounts wisely
Before opening a new credit account, consider how it might impact your credit score. New cards could increase your total credit limit across accounts, build credit history, and improve your credit score long term. But initially, your credit score could be affected upon opening a new card. The key is to use credit cards responsibly as you build credit history.
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