Does applying for credit cards lower your credit score? It's a question that lingers in the minds of many millennials as they begin their personal finance journey. It can be puzzling – on one hand, you're trying to establish a solid credit history, but on the other hand, you've heard that multiple credit applications can hurt your score. In this article, we'll break down the truth behind this common question, help you understand the factors at play, and provide a realistic example to illustrate the concepts in action.
Does Applying For Credit Cards Lower Your Credit Score Table of Contents
Hard Inquiries vs. Soft Inquiries
Hard Inquiries vs. Soft Inquiries
When you apply for a credit card, the issuer runs a check on your credit report to assess your creditworthiness. This process is called a hard inquiry or a "hard pull." Hard inquiries can lower your credit score, but before you panic, it's important to understand the difference between a hard inquiry and a soft inquiry.
A hard inquiry happens when a lender checks your credit for approval. This type of inquiry has an impact on your credit score. Examples of situations that can trigger a hard inquiry are:
- Applying for a credit card
- Applying for a mortgage or car loan
- Requesting an increase in your credit limit
A soft inquiry occurs when you, a potential employer, or a company checks your credit as part of a background check or for pre-approved offers. Soft inquiries do NOT affect your credit score. Examples of soft inquiries include:
- Checking your credit score
- Employment background checks
- Pre-qualification for credit card offers
How Much Do Hard Inquiries Impact Your Credit?
While hard inquiries do affect your credit score, their impact may not be as significant as you think. According to FICO, hard inquiries typically only lower your score by about five points or less. Furthermore, inquiries only make up 10% of your overall FICO score calculation.
The good news is that the impact of hard inquiries on your credit score diminishes over time. While the inquiry stays on your credit report for two years, its effect on your score is most significant in the first six months. After that, the impact gradually lessens, and by the second year, the inquiry shouldn’t affect your credit score at all.
Rate Shopping vs. Multiple Credit Card Applications
If you're applying for multiple credit cards within a short period of time, the cumulative effect of multiple hard inquiries could have a more significant impact on your credit score. However, the rules are different when you're shopping for a mortgage or car loan.
Lenders understand that you might want to compare rates from different lenders when shopping for these types of loans. So, within a specific window of 14-45 days (depending on the scoring model), multiple hard inquiries for the same type of loan will only count as a single inquiry, allowing you to shop around without significantly harming your credit.
Does Applying For Credit Cards Lower Your Credit Score Example:
Meet Jane, a millennial looking to build her credit score. Jane is considering applying for a new credit card and has three different cards in mind. Jane decides to apply for all three cards within a period of two months. As a result, three hard inquiries show up on her credit report.
Let's assume Jane's credit score was 750 when she started applying. After the three applications, her credit score might drop by approximately 15 points due to the multiple hard inquiries. Jane is disappointed, but she decides to buckle down and prove her creditworthiness by using her new cards responsibly. Over the next six months, Jane pays her bills on time, keeps her credit card balances low, and maintains a good credit usage ratio. As a result, Jane's credit score recovers and even surpasses her starting score of 750.
In conclusion, applying for credit cards can temporarily lower your credit score, but the impact is usually minimal unless you're applying for multiple cards in a short period of time. It's essential to understand the difference between hard and soft inquiries and the factors that contribute to your overall credit score. With responsible credit use, any effects of hard inquiries can be mitigated and overcome in a relatively short period.
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