You want, or need, a new credit card. But you don’t want your credit score to take a hit.
Well, I’ve got some good news for you…and some bad.
Contrary to common opinion, opening a new credit card is not necessarily bad for your credit, just like cancelling a credit card is not necessarily good for your credit. In fact, opening credit cards can actually help you to improve your credit score in the long run. But it can kill your credit if you’re not careful.
Credit scores aren’t quite as black and white as people think. Your credit score is made up of five different factors, often called “The FICO 5”. Because of this, and because everyone’s financial situation is unique, the same action can raise one person’s score while lowering another’s.
It helps to take a look at the factors that make up your credit score in order to better understand how certain actions will affect it. Here are “The FICO 5” and the percentage of your score each factor makes up.
Payment History: 35%
If you know nothing else about how your credit score is determined, know that paying your bills on time is absolutely the most important thing you can do to improve and maintain your credit score.
Credit Utilization Rate: 30%
Your debt to credit ratio should be below 30% to maintain a good credit score. For example, having $1,000 of debt on a credit card with a $10,000 limit is much better for your credit score than having $500 of debt on a credit card with a $1,000 limit.
Length of Credit History: 15%
This is the amount of time you’ve had access to credit (since your first credit card) as well as the average length of time you’ve had all of your credit cards. The longer, the better.
New Credit: 10%
Having too much new credit on your credit report poses a risk and thus lowers your score.
Types of Credit Used: 10%
The more variety you have in your credit history, the better. If you have credit cards and an auto loan, for example, these are two different types of credit, and your score will be improved.
With this understanding, let’s take a look at how opening a new credit card impacts your score.
3 Ways Opening a New Credit Card Can Hurt Your Credit Score
- Hard inquiries hurt your credit score. Every time you apply for a new credit card, the credit card company pulls your credit report, so your score gets knocked down a few points even if you are denied for the card. The decrease is only temporary though; your score should bounce back up within a few months, and inquiries older than a year are not considered.
- Lowering your average credit history age hurts your credit score. By applying for a new credit card, you are slightly lowering the average age of your credit history. If your credit history is fairly long (even over a few years), this isn’t a big deal. But make sure you don’t close one of your oldest cards or replace it with a new upgraded card, or your average age will decrease significantly.
- New credit can hurt your credit score. When your credit score is calculated, FICO looks at how many new accounts you have opened. If you have opened too many recently, it’s considered a risk, and your credit score will go down. As long as you aren’t applying for many accounts in a short period of time, this isn’t a problem.
3 Ways Opening a New Credit Card Can Help Your Credit Score
- A lower credit utilization ratio will increase your score. Ideally, your credit utilization ratio should be below 30%. If you have $3,000 debt, you will want access to at least $10,000 in credit to maximize your score (for example, two credit cards, each with a $5,000 limit). Opening a new credit card, or increasing the limit on an existing credit card, is a great way to quickly decrease your credit utilization ratio – but only if you don’t rack up more debt.
- Opening a new type of credit account will increase your credit score. Perhaps you’ve taken out loans before but rarely or never open credit cards. Adding one into the mix can be helpful.
- On time payments are the best way to increase your credit score. If you open a new credit card and always pay it off in full each month by the due date, eventually you’ll start to see your score increase.
5 Most Important Tips for Opening a New Credit Card
- Only apply for one credit card at a time, and don’t apply for more than one card every six months or so. If you’re denied for your first credit card application, it’s okay to apply for a different credit card in a short period of time, but you should minimize inquiries.
- Because of #1, you’ll want to do your research and read reviews before applying for a new credit card. Make sure that you’re applying for a card you can qualify for. If you have an average credit score, don’t apply for a credit card that requires an excellent score.
- You’ll also want to make sure that you choose credit cards that fit your spending and needs well. If you drive a lot, get one that offers rewards on gas. If you want to travel on the cheap, lots of cards offer huge savings on flights and hotels. For those with a lot of debt, there are even credit cards that help you pay off your debt interest-free.
- Don’t apply for a credit card right before you finance a major purchase. If you plan to purchase a house or car, for example, in the next 6-9 months, it’s best to limit credit inquiries for now.
- Don’t be scared of high credit limits. If you can be responsible with your new credit access, the higher the credit limit, the better. It will decrease your credit utilization ratio.
Whatever you do, make payments on time every month. If you can, always pay your cards off in full. Never close old accounts unless they’re charging you an annual fee. If you’re worried about spending money on an old account, simply cut up the card.
Finally, spend responsibly! Don’t max out your new card. Never open a new card with the intention of spending more than you can afford to pay off.