You've been doing research about credit scores, and you know one of the FICO score factors is new credit. Another 15% comes from length of credit history (including the age of your newest account). And since you're a smart cookie, you figured out that opening a new credit card would negatively affect factors composing 25% of your FICO score.
But you might be missing out on the big picture. After all, lenders wouldn't want to use a system that discourages people from opening a new account.
Yes, applying for a new credit card could temporarily hurt your credit score. In the long run, though, it should provide a boost, as long as you use your new credit responsibly.
Let's take a look at exactly what happens to the important factors in your credit score when you apply for a new credit card.
Why applying for a new credit card can hurt your credit score
The first step a bank takes when you apply for a new credit card is to make a hard credit inquiry. A hard inquiry will negatively impact the new credit factor on your FICO score. But, if you only have one or two credit inquiries on your report within the last 12 months, the impact will be minimal.
Lenders don't like to see lots of hard credit inquiries because it makes the consumer look desperate for a loan. It's completely normal behavior to have one or two loan or credit card applications in a year, though. A FICO score only factors in hard inquiries from the last 12 months, but the inquiries stay on your report for two years.
If the bank approves your credit card application, you'll see the account show up the next time you check your credit report. But this also negatively impacts the new credit factor. FICO will ding your score based on how long it's been since you opened a new account (0 months) and the number of new accounts. (It's unclear what's considered a "new account.")
Additionally, a new credit card account will negatively impact the length of credit history factor. The impact will be lower if you're early in your credit history, but if you only have one 15-year-old credit card on your account, it could have a much bigger impact. Length of credit history considers the age of your oldest account, but also the age of your newest account and the average age of all accounts. A new credit card will negatively impact those last two.
There are much more important factors to consider
The two most important factors that determine your credit score are your payment history -- are all of your payments on time? -- and credit utilization -- the ratio of debt to available credit limits. Combined, they account for 65% of your credit score, and a new credit card could help improve your credit utilization (which accounts for 30% of a FICO score).
Applying for a new credit card shouldn't have any impact on your payment history. Nor should it result in any abrupt changes to it going forward. If you apply for a new credit card, you should be doing so with the mindset that you will make payments on time and in full at the end of every month.
On the other hand, it could have a significant impact on credit utilization. Let's say you only have one credit card now -- your only line of credit. It has a credit limit of $10,000. You apply for a new card, and you get approved for another $10,000. Assuming your spending habits don't change, you'll cut your credit utilization in half. That can more than offset the negative impact of a hard credit inquiry and a decline in your average age of accounts.
In fact, applying for new credit cards and lowering my credit utilization helped me achieve my all-time high credit score.
The final factor in determining your credit score is credit mix, which accounts for 10% of your score. If you already have a credit card, applying for a new credit card shouldn't have an impact on this factor. If you don't, a new credit card account on your report will have a positive impact on this factor, further offsetting the negative impacts of opening a new account.
Focus on the big picture, and your credit score will take care of itself
FICO rewards good credit behavior. That mean making your payments on time and staying well below your credit limits. As long as opening a new account with a credit card company doesn't negatively impact either of those behaviors, your credit score shouldn't be much of a problem for any loans or credit applications in the future.
In fact, opening a new credit card now can help improve your credit score to the point where it needs to be when you want to get the best interest rate possible on a mortgage or auto loan.
Opening a new account of any kind can produce a small ding on your credit report, but the more important factors simply outweigh the potential negative impact from getting a new credit card.
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