Will a New Credit Card Hurt Credit Score?
You may have heard how new credit is a factor in your FICO score and you may be wondering if enrolling a new credit card hurt credit score.
15% of your credit score comes from the length of your credit history. With this in mind, you’ve probably figured out that getting a new credit card could negatively affect 25% of your FICO score.
However, you may not be seeing the big picture. While applying for a new credit card hurt credit score temporarily, it should provide a boost in the long run. That is provided that you use your new credit responsibly.
Here is what happens to the critical factors in your credit scores when you decide to open a new credit card.
Does Applying for a New Credit Card Hurt Credit Score?
What a bank usually does when you apply for a new credit card is to first conduct a hard credit inquiry. This process would negatively impact your FICO score. But this impact will be minimal if you only have a couple of credit inquiries on your report.
Lenders do not like seeing a lot of hard credit inquiries because it makes the consumer appear desperate for a loan. But it’s normal for anyone to have one or two credit card applications in a year in their records. Only hard inquiries in the last 12 months are factored in your FICO score but they do stay in your report for up to 2 years.
Once the bank approves your application, the new account will show up when you check your credit report again. This could also affect the new credit factor negatively. Additionally, your new credit card account will have a negative impact on the length of your credit history, especially if you only have a 15-year-old credit card on your records.
Important Factors in Determining Your Credit Score
There are 2 very important factors in determining your credit score. They are your payment history and utilization of credits. These two account for 65% of your credit score. In this way, a new credit card could also improve your credit utilization.
Payment history is how prompt you are in making your payments. Do you make your payments on time? And credit utilization is the ratio of debt to your credit limits. Utilization of credits make up 30% of your FICO score.
Your payment history will not be affected when you apply for a new credit card as long as you continue making your payments on time and in full for each month. However, your credit utilization could be significantly improved.
If your current credit limit on your one credit card is $10,000 and you are approved for another $10,000 on your new card, your credit utilization will be cut in half assuming you don’t change your spending habits. A lower credit utilization can help you achieve a higher credit score.
The Big Picture
Good credit behavior is greatly rewarded by FICO. If you make your payments on time and do not exceed your credit limits, your credit score should not be greatly impacted when you open a new credit card in the future.
As a matter of fact, a new credit card can help improve your FICO score and help you get better interest rates on mortgages and auto finance.
While opening a new account whether it’s a credit card or a loan can put a ding on your credit report, there are more important factors that outweigh these negative impacts which answers the question does opening a new credit card hurt credit score.