How Opening a New Credit Card Affects Your Credit Score
Before you make another credit card application, you should first know how opening a new credit card is going to affect your credit score. Knowing the impact of opening a new credit card can keep you from doing so under the wrong circumstances.
Three Ways a New Credit Card Can Hurt Your Score
Opening a new credit card might boost your credit score if this is your first credit card. In fact, you might not have a credit score before you've opened your first credit card. Once your new card has been open for at least six months, the credit score calculation will have enough information to generate a credit score for you.
In other situations, opening a new credit card could hurt your credit score rather than help it. Here's how.
A new credit card lowers your average credit age. Fifteen percent (15%) of your credit score is based on your credit age which generally measures the amount of experience you have using credit. Generally speaking, the more experience you have with credit, better your credit score will be.
There are two factors to your credit age: the age of your oldest account and the average age of all your accounts. Opening a new credit card will lower the average age of all your accounts, especially if it’s been awhile since you last opened a credit account.
A hard inquiry is placed on your credit report when you apply for a new credit card even if you're not approved and even if you later decide not to accept the credit card. Hard credit inquiries show that a business has checked your credit report to review your credit for an application you made.
Inquiries are 10% of your credit score. Depending on the other information in your credit report, an additional inquiry could cost a few credit score points. It may not sound like much but it could mean the difference between a good credit score and a bad one - a good loan rate and a less than ideal loan rate. (See: How Your Credit Score Affects Your Interest Rate)
Opening a new credit card could raise your credit utilization if you make a big charge on it right away. For example, if you open a new store credit card and rack up a balance the same day.
Your credit utilization is the ratio of your credit card balances compared to their credit limits. If you charge a balance that takes up much of your credit limit, i.e. have a high credit utilization, your credit score will take a hit. That’s because 30% of your credit score considers how much of your available credit is being used. The more of your new credit limit you’re using, the more your credit score will hurt.
Opening a New Credit Card Isn't All Bad
In some cases, opening a new credit card can improve your credit score. If you don't make any new purchases on your credit cards, including the new one, your overall credit utilization will drop and your credit score could increase.
You could get more points in the "types of credit" portion of your credit score, which is 10% of your score and benefits when you demonstrate that you can handle different types of credit. Of course, this depends on the types of accounts you already have open and the type of credit card you open. Opening a new store credit card won't necessarily give you a boost in this area because they're not given as much weight in your credit score. But opening a new bank card can help, especially if you have only a few bank credit cards.
Opening a new credit card and using it wisely can help boost your credit score in the long run, especially if you have damaged credit and you need a positive payment history to offset past delinquencies.
Be sure that you charge only what you can afford to pay on your new credit card and always make your monthly payments on time.
You should always open new credit cards on an as needed basis, rather than opening one simply to attempt to boost your credit score.