Ever wondered if applying for a credit card might have an impact on your credit score? You're not alone! Many people have misconceptions about how credit card applications and credit inquiries can affect their credit ratings. In this article, we'll debunk common myths about credit card applications, explore how your credit score is affected, and share some essential tips on how to minimize the impact of new applications.
Does Applying For Credit Cards Hurt Your Credit Score Table of Contents
Types of Credit Inquiries
There are two types of credit inquiries – hard inquiries and soft inquiries. Knowing the difference between these can help you protect your credit score:
Hard Inquiries
- When you apply for a credit card or a loan, the lender conducts a hard inquiry to review your credit report before granting approval.
- Each hard inquiry gets recorded on your credit report and can impact your credit score negatively.
- Too many hard inquiries in a short period might indicate that you are a high-risk borrower and can lead to a decrease in your score.
Soft Inquiries
- Soft inquiries occur when you check your own credit report, or when lenders prequalify you for offers without your request.
- They don't have any negative impact on your credit score, as they are not linked to an application for new credit.
- Soft inquiries are visible only to you, not to lenders or future creditors.
How Credit Card Applications Affect Your Credit Score
A single hard inquiry typically has a small impact on your credit score, usually a decrease of less than five points. However, multiple credit card applications in a short period can produce several hard inquiries, and the accumulated effect can be much more significant.
Length of Credit History
A new credit card account can also reduce the average age of your credit accounts, which can lower your score slightly. This is because a longer credit history is typically seen as more favorable in determining your creditworthiness.
Credit Utilization Ratio
On the other hand, successfully obtaining a new credit card can boost your credit score over time by increasing your overall credit limit. This, in turn, can lower your credit utilization ratio, which is a significant factor in your credit score calculate. Credit utilization ratio is the percentage of your total credit card balance compared to your total credit limit, and it's recommended to keep it below 30% for a healthy credit score.
Does Applying For Credit Cards Hurt Your Credit Score Example:
Imagine Sarah has a credit score of 750. She decides to apply for a new credit card with a $5,000 credit limit to manage her monthly expenses. Upon applying, a hard inquiry is recorded on her credit report, and her score drops by three points.
However, the addition of the new credit card increases her overall credit limit, and as a result, her credit utilization ratio decreases. Over the following months, Sarah continues to pay her credit card bills on time and keeps her utilization ratio low. This good financial behavior contributes to her credit score eventually increasing.
As you can see, applying for a credit card can have a temporary minor impact on your credit score. However, by keeping your credit inquiries at a minimum, maintaining a healthy credit utilization ratio, and making all of your payments on time, a new credit card can eventually help improve your overall financial health.
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