Does Applying For A Credit Card Affect Credit Score?

Applying for a New Credit Card – How it Affects the Credit Score

The credit card provider will obtain your credit record for a credit check when you complete a form for a new credit card. This begs the issue of whether qualifying for a credit card compromises your credit score. The quick answer is yes; for a limited period, applying for a new credit card might somewhat damage your credit score. The little decline should not cause much concern, however, unless you want to buy anything like a home or a vehicle that cannot be purchased without an outstanding credit score. The procedure you take in applying for a new credit card is broken out here.

Hard Inquiries

This is because when you apply for a credit card either through the website or through a phone call or even physically you complete an application form that the credit card company uses to access your credit report to determine whether they want to open an account for you or not. To verify your report, they undertake something known as a hard inquiry. Hard inquiries are those that appear on your credit report and can have an impact on your credit scores.

Excessive usage of hard inquiry in a short space of time may also harm your credit score since it looks as if you are seeking credit frantically. Still, most credit scoring models allow rate shopping. For instance, if you are looking for an auto loan, the lenders will know that you are comparing different rates and therefore will not impact your credit report if you check your score frequently in a short time. This allowance also applies to credit card applications.

How Long Do Hard Inquiries Last?

Here are some key points about how long hard credit inquiries stay on your credit reports and impact your scores.

Hard inquiries can remain on your credit reports for two years depending on the state of the law in the country you live in though the effects reduce with time.
The majority of credit scoring models take into account only inquiries made within the last year.
Hard inquiries can lower credit scores by 5-10 points per inquiry during the first year of credit report generation. All in all, after one year the effect is negligible, maybe one or two percentage points at most.

When you apply for several credit cards at once you may lose some points for a while. For instance, three new inquiries could result in bringing a person with a credit score of 750 down to approximately 735. Nevertheless, if no other changes are made, then the scores should recover to normal within less than six months.

Length of Your Credit History

The other reason that opening a new credit card temporarily reduces the scores has to do with the length of credit history. The average credit age is also factored in credit scoring models used by credit reporting agencies.

By opening a new credit card, you reduce the average age of accounts which in turn affects your scores in the long run. The decline is minor and only for a short period. However, those who just started building their credit history will feel the difference even more.

Another reason for having credit accounts active is beneficial for long-term credit building because having older accounts will raise the overall average age of accounts and will help to compensate for new accounts.

New Credit Card Emerges as More Debt

The credit utilization ratio, which refers to the amount of credit you currently have and the amount you are using, is another characteristic that influences most credit scoring models. In general speaking, it is suggested that this percentage should be less than 30%. Even if you do not make any purchases and charge when you open a new credit card, your total credit line increases.

That’s why, regarding scoring, it may seem that you’re being burdened with more debt because newly opened credit lines are immediately taken into account. For instance, if your combined limits before being approved for a new $5,000 card were $10,000, you carried $2,000 balances before. The utilization rate you had was at 20%. However, with a new card you can control your balances and your credit utilization is a mere 14% even though you have not paid off your balances.

The effect is temporary if one does not incur more loans just because one has a higher line of credit. In one or two billing cycles when there are no other changes made to your credit report, your scores will return to normal.

Measures to Reduce Score Fluctuations

If you want to apply for a new credit card without lowering your credit scores too much, consider these tips.

Get credit slowly - It is advised to open a new credit card account at least every six to 12 months instead of applying for many at once. If you require more cards for earning rewards, consider requesting a small credit line on existing cards.
Request credit line increases from current creditors – As long as your account is in good standing, you should request your credit limits be raised periodically, which keeps your utilization ratio low while avoiding multiple credit inquiries. Again, the majority of the lenders allow you to apply for a CLI online or through the mobile application.
Always clear balances – Be sure to clear your credit card balances in full every month. Maintain low balances in the months before applying for new credit. In case of credit limit opening, maintain the credit utilization ratio below 30% of the credit limit.
Monitor credit reports – It is important to review credit reports from Equifax, Experian, and TransUnion every year. Ensure there are no errors that are pulling down your scores on the test. You can get free reports once a year at annual credit report. com.
Credit report check – The use of monitoring scores makes you aware of how various credit decisions affect the reports and FICO or VantageScore. Some credit cards and personal finance applications update it for free every month.
Be patient – Understand that fluctuations from consumer-initiated hard inquiries such as credit card applications are usually relatively minor and short-lived. Establishing sustainable credit responsible credit utilization patterns will mean much more than a few inquiries.

The Bottom Line

Even for most people, applying for new credit lowers their credit scores slightly for a short period only. For those with relatively short credit histories or high balances about credit limits, the drop may be more. But if you will not be applying for a large loan shortly, there is no need to worry about credit inquiries’ short-term impact. Practical and correct credit behaviors will cause changes in measurements much more deeply in the long term.

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