Your credit score is a three-digit number used by creditors and lenders when deciding whether or not to approve your applications. Each time a business pulls your credit score to approve an application, it affects your credit score.
Applying for a Credit Card
Credit card issuers take a peek into your credit history when reviewing your application. The card issuer wants to know how you've handled your credit cards and other debts, the number of accounts you have open, whether you've paid on time or have serious delinquencies, and the balance you're carrying across your credit cards and loans. Your credit report is the best place to get this information.
Whenever a business, a credit card issuer, for example, checks your credit report as a result of your application, an inquiry is placed on your credit report to show that someone's checked your credit. The number of inquiries into your credit history within the past 12 months accounts for 10% of your credit score.
Rather than reviewing your full credit report, many creditors and lenders check your credit score to quickly make a decision on your application and to set the pricing and terms if you're approved.
How Applications Affect Your Credit Scores
You have multiple credit scores, but the most common credit-scoring model is used by FICO. Since new applications for credit make up 10% of your FICO credit score, simple math indicates your credit score could fall as much as 70 points if you have a 700 credit score. Fortunately, it's not likely that you'll lose that many points over a single credit card application because there's much more information included in your credit score that will "absorb" the impact of one credit card application. However, making multiple applications in a short period of time impacts your score more significantly. The exact impact on your credit score depends on the other information in your credit report.
Whether your application is approved or denied does not directly affect your credit score. If you're approved, opening a new credit card could cost you points in the age of credit history area because it lowers your average age of credit history. Being denied, on the other hand, won't impact your credit score. The average age of your credit accounts makes up 15% of your credit score.
Even if your credit score isn't hurt by the additional inquiries, a card issuer might deny your credit card application simply because you've applied for several other cards recently. Too many recent applications can be perceived as desperation for credit and desperation is almost always a turn-off. It also could indicate that you're taking on too many accounts in a short period of time, a move that could make it difficult to afford all your new monthly payments. Some credit card issuers deny cardholders who appear to be churning credit cards—the practice of repeatedly opening credit cards to earn the signup bonuses.
The good news is that only credit inquiries made within the past 12 months are used to calculate your credit score. And after 24 months, the inquiries fall off your credit report completely. That time limit only applies to credit inquiries. Other negative credit report information will remain on your credit report for longer.
Knowing When to Apply
Applying for a credit card can hurt your credit score in the short term which is why you should avoid making new applications in the six to 12 months before applying for a major loan like a mortgage or auto loan.
As long as you're responsible with your credit card and your other financial accounts, your credit score can rebound from any points lost with a new credit card application. And remember, while there's a chance your credit score could be impacted by a new credit card application, there's no guarantee that will happen.