Do Credit Card Applications Affect Credit Score?
Does Applying for Credit Cards Have an Impact on Your Credit Rating?
The reason why people consider applying for new credit cards so risky is because it is thought to be one that will harm your credit score. Anyway, one of the components of the FICO credit score is the number of recent credit inquiries you have. A high frequency of applications may signal to the credit scoring system that you are in dire need of credit and therefore likely to repay the credit.
Still, the effects of applying for a new credit card are not always as negative as one might expect. Applying for a new credit card does not necessarily hurt the scores, especially if it is for a new account. It may also help your credit, depending on your profile. Here is what you need to know about how credit card applications work and when and how applying for a new card can change your credit score.
How do Credit Card Applications Impact Your Credit Report?
Whether your application for a credit card, an auto loan, a mortgage, or a personal line of credit calls for a credit history and score, the creditor will ask for your credit reports whenever you apply for any new credit. This results in what is known as a hard inquiry on your credit records at one of the three main credit bureaus—Equifax, Experian, and Transunion.
Reportedly to the credit reporting agency, hard inquiries show up on your credit reports for one year. They also provide you or any other credit provider with your whole credit record. Still, most models consider only questions asked over the last year. The questions are arranged so that, for instance, a vehicle loan is recorded as one inquiry when a credit seeker asks for more than one credit within a short time. The scores are not calculated considering any questions asked twelve months before credit application.
Immediate Impact on Scores
A new credit card application creates a hard inquiry and it has a small negative effect on your credit scores which usually is less than five points. The scoring rules of some models may not allow points to be deducted for specific limited numbers or certain types of inquiries. However, on average, you should be prepared to witness a slight decline in your scores during the first few months of your application for new credit cards/loan(s).
The drop itself is relatively small and short-lived in most cases. More important is whether you are approved for the new account and how that card adds to the other components that determine your scores in the long run, which are outlined below.
Possible Long-Term Consequences on Credit Score
Even if you get approved for a new credit card or if you have been rejected, there are a few ways that getting the new account can affect your credit profile and score in the future beyond the effects of the inquiry itself.
- Lower Average Account Age: Duration of credit is one of the parameters that are considered in the credit scores. Applying for a new credit card means creating a new credit file that has zero years of credit history. This reduces your average accounts age so it is likely to lower your scores in a while. This is why it is unbeneficial to close one card, particularly when opening many others in immediate succession.
- Higher Credit Utilization: This refers to the percentage of your total credit limits that you are currently utilizing by having various credit cards. If your total credit limit rises with a new card but your spending remains the same, this will bring down your total credit utilization. This is an advantage in the long run since lower utilization helps in increasing credit scores.
- Additional Credit Mix: What we hear is that credit types are important to consider, not just total accounts. Having credit cards plus installment loans such as mortgages, student loans, and auto loans can help increase your scores. Another card in the deck.
- More Available Credit: Better total credit limits which prove to lenders that you are capable of handling more credit. If balances are kept low, credit utilization is a factor that can positively affect your credit rating. So, just do not overburden yourself with credit that you do not require or that you would not be capable of repaying.
- Missed Payments: Credit utilization rates, new credit, and credit mix affect credit scores, and for any credit history, late or missed payments have the biggest negative impact. This is where a new account may cause the most damage if you fail to pay your bills on time after making the initial inquiry. Use autopay as a backup measure to ensure that one does not incur penalties for lateness or have their credit score lowered.
When Do Inquiries Not Lower Scores?
There are some scenarios when credit inquiries are reported but do not affect credit scores. Two typical scenarios involve situations when you run your credit check or when lenders review your credit without your consent in a soft inquiry. Soft inquiries are not seen by any other lenders and they also do not affect the credit score.
Another example is rate shopping, where multiple inquiries within a focused period are effectively grouped and can be seen by scoring models as only one inquiry. This offers you an opportunity to settle for the best since you can move around. This may range from checking rates on auto loans, mortgages, or personal loans within a certain period say 30-60 days. Inquiries made within 30 days on student loans are also clustered together.
Some credit card applications do not impact your credit scores in any way. Credit inquiries are not reported when one applies for a store credit card such as those associated with fuel company credit cards for instance. The first aspect is checking whether one meets the requirements of the particular credit card before one gets to apply for it, meaning that one can check it with no impact on the credit score. This means soft contacts, but no actual applications until you determine that you meet the prequalification requirement.
Other types of credit trade lines also are not typically included in the scores when the authorized user trade line accounts are first opened. If you have been listed as an authorized user on someone else’s credit card, then such a credit card will reflect on your credit report but does not count as a new trade line or inquiry to your real credit file in case you apply for your credit card. Thus, the purpose of the inquiry impact can be served.
How Many Lost Business Leads Are Too Many?
Based on most scoring models across the board, single-digit inquiries made over 12 months are normally not very alarming, 10-20 inquiries will make you more risky, and anything above that will be detrimental to your scores in the long run. It is important not to exceed the number of inquiries that can be detrimental to a credit score; the rule of thumb is six inquiries per scoring model, but if they are distributed between the three bureaux then up to ten is not necessarily harmful. The level of mortgages, auto, and student loans are typically deducted from the level of new revolving credit inquiries.
Remember that while many scoring models include all the inquiries, some of the more current FICO models only include inquiries for credit that were newly established – not inquiries for accounts that were not opened. Thus, if you are rejected for several new cards within a short period, the declined applications with inquiries will not harm you as much as expected because no accounts were obtained.
The recommendation for improvement is not to create too many new revolving accounts too quickly. Do not apply for new credits in large quantities within a short period because it will lower your scores. Do not use credit cards regularly but when you feel that you need more credit or extra cash in your pocket.
The primary difference between hard inquiries and soft inquiries is the type of credit check that was conducted.
The last difference is between a hard credit inquiry and a soft credit inquiry. Hard inquiries are the ones that are made by you when you apply for new credit or the ones you make for your credit reports and scores. These are reflected in the credit score and remain on the credit file open for other lenders to see for 12 months.
On the other hand, soft inquiries are those credit checks done by companies pulling your credit in the background for instance for credit card prescreened mail offers or promotional inquiries where you have an account with the company, insurance or employment purposes among others; multiple soft inquiries are usually considered as one inquiry. Even more importantly, these credit checks do not affect your scores in any possible way.
The only thing that should be avoided about inquiries is using it to get a new credit while ensuring that the number of inquiries and requests for credit are kept to a minimum to avoid triggering any alarms. Long-term planning is better than short-term gains. The upside of having access to more usable credit overcomes the costs of a separate inquiry and reductions in scores.
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