Are you in the market for a new credit card? Or perhaps you're new to the credit world, and you've been considering opening up your very first card. As you start the application process, you might be wondering, does applying for credit cards affect your credit score? In this Flik Eco blog post, we will dive into the relationship between applying for credit cards and your credit score, breaking down the process in an easy-to-understand and relatable manner. Get ready, because we're about to unleash some essential personal finance knowledge!
Does Applying For Credit Cards Affect Credit Score Table of Contents
Understanding Credit Inquiries
When you apply for a credit card, the issuer typically does a 'hard inquiry' on your credit report. A hard inquiry is a record of the creditor's request to view your credit, which can potentially impact your credit score. There are two types of credit inquiries: hard and soft.
Hard Inquiries
- These are a result of an application for credit, like applying for a credit card, loan, or mortgage.
- It does have an impact on your credit score, but usually not by a significant amount.
- Can remain on your credit report for up to two years, but impacts your score for about one year.
Soft Inquiries
- Occurs when you or a creditor checks your credit report for pre-approval or for other purposes, such as employment checks.
- Does not have an impact on your credit score.
- Can be done without your permission.
How Applying for Credit Cards Impacts Credit Scores
When you apply for a credit card, the hard inquiry can cause an initial, temporary dip in your credit score. However, this impact is usually minimal. For most people, applying for a credit card will lower their credit score by fewer than five points.
The most significant factor affecting your credit score is your payment history, which accounts for about 35% of your score. By adding a credit card to your mix and paying it off on time every month, you can improve your score over time.
Factors to Consider When Applying
- Number of Applications: Each time you apply for a credit card, it can result in a small temporary dip in your credit score. If you apply for multiple credit cards in a short period, it can have a more significant impact on your credit score.
- Age of Credit History: Opening a new credit card will reduce the average age of your credit accounts, which can hurt your credit score. Therefore, if you have a relatively short credit history, consider this factor before applying.
- Credit Utilization Ratio: Having a new credit card can affect your credit utilization ratio, the calculation of how much credit you're using compared to your available credit limits. A lower ratio is better for your credit score. Adding a new card can increase your available credit and potentially lower your utilization ratio if you maintain responsible spending habits.
Does Applying For Credit Cards Affect Credit Score Example:
Imagine you're a recent college graduate with a stable job and a clean credit history. You decide to apply for a credit card to start building your credit. After doing your research, you find a credit card that offers cash back rewards and a low annual fee.
Upon completing the application, the issuer does a hard inquiry, and your credit score dips by a few points. However, over time, as you use the card responsibly and pay off your balance in full each month, your credit score starts to climb. Your credit utilization ratio stays low, your payment history is consistent, and your average age of credit accounts gradually increases. In the end, applying for the credit card has a positive effect on your credit score.
Now you know that applying for credit cards does have an impact on your credit score, albeit only a minor and temporary one. By understanding the ins and outs of the application process and using credit responsibly, you can reap the benefits of having a credit card while mitigating potential drawbacks. Share this article with your friends to spread financial wisdom, and don't forget to explore other guides on Flik Eco for more personal finance tips and insights.
