Whether you're looking for the best credit card for a balance transfer, no annual fees, travel points, or cash back, you'll likely find several great offers. While it may make sense to apply for two or more credit cards to get the best one, applying for more than one credit card at a time could cause your credit score to drop.
By knowing your credit score and why it can be impacted by applying for new credit, you may be able to get more than one credit card to help you meet your financial goals.
Your Credit Score
Your credit score is viewed when you apply for a credit card or loan. Lenders and other parties use your credit score to decide if they should grant you credit. It may also be used by potential landlords, car insurance companies, and even employers. There are five components of your credit score:
- Payment history
- Amounts owed/credit utilization
- Length of credit history
- New credit
- Credit mix
Applying for multiple credit cards primarily affects the new credit score factor. This is because applying for credit signifies that you are considering taking on new debt. Once you receive one or more new credit cards, other credit score factors, including credit utilization, will also be impacted.
Actively manage your credit card use. Applying for multiple credit cards could damage your credit score unless you stay on top of your accounts.
Credit Inquiries and New Credit
The new credit portion of your credit score accounts for 10% of your score and includes credit inquiries. It's not uncommon for your credit score to drop by a few points when you apply for a new loan or credit card. When you're applying for multiple credit cards, your credit score will show a greater impact than if you had only applied for one.
Each time you apply for a credit card, there is a hard inquiry placed on your credit report. A hard inquiry will not always affect your credit score, but it may.
If your credit report shows numerous hard inquiries, potential creditors will look at those inquiries as an attempt by you to receive more credit. This may raise concerns about you taking on too much debt and possibly being at a higher risk of defaulting on your debts. The number of inquiries that would be concerning depends on many factors such as the amount of time since you opened your last account, when your last inquiry was, and the strength of your credit history. Some people will be affected by hard inquiries when applying for multiple credit cards and some won’t.
- How Long Do Hard Inquiries Impact Your Credit Score? Hard inquiries will remain on your credit report for two years but will only impact your credit score for one year.
- How Much Do Hard Inquiries Impact Your Credit Score? Each hard inquiry impacts your credit score by less than five points. If you only have a few accounts and a short credit history, you may see more of an impact on your credit score than if you have more accounts and a longer credit history.
If you engage in credit card churning to take advantage of signing bonuses and loyalty programs, your credit score could be impacted. It becomes apparent to anyone looking at your credit history that you are engaging in this practice.
The negative impact of applying for multiple credit cards may not be minimal, so consider your true credit needs and your credit score before you apply.
Amounts owed, also referred to as "credit utilization," is 30% of your credit score and is impacted by applying for multiple credit cards. If your total credit utilization is 30% or less, your credit score shouldn't be negatively impacted. If you open two new credit card accounts and stay below 30% of your credit limit, you may improve your credit utilization score, but you may still take a small hit to your credit score due to two or more hard inquiries.
To calculate your credit utilization ratio, look at how much debt you owe on each of your credit cards compared to your credit limits. If you have a credit limit of $2,000 and you owe $500 on a card, your credit utilization would be:
- Credit Utilization = $500/$2000 = .25 or 25%
Even though your credit utilization ratio will improve if you open multiple credit card accounts and keep the balances below 30% of your credit limit, you may find that lenders are concerned with your ability to make the payments on several cards. While experts recommend you keep your credit utilization under 30%, people with the highest credit scores usually have credit utilization ratios below 10%.
How to Avoid Mistakes When Applying for Multiple Credit Cards
- Wait a minimum of 90 days between opening new card accounts, even if you are trying to get signup bonuses or other rewards. Otherwise, your credit score may be negatively impacted.
- If you have multiple credit cards, pay off your balances in full every month to keep your credit utilization ratio as low as possible.
- If you manage your credit well, having multiple credit card accounts is not necessarily bad since it decreases your credit utilization ratio.
- Do some strategic planning before applying for multiple credit cards. If you already have a good travel card, for example, you might want to open another credit card account with a lower interest rate or a zero percent promotional rate that allows balance transfers.
Managed correctly, credit cards are valuable tools when used for emergencies and to rake in signup bonuses, cash back, and loyalty rewards.