Opening a new credit card can increase your credit score, provide you with extra perks and rewards, decrease your interest rates, and give you a back-up in case of financial emergencies.
However, applying for a new credit card can also decrease your credit score, increase your interest rates, and land you in a pile of debt.
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Credit cards are neither inherently good nor inherently bad. They are a financial tool, and their effect on your life has everything to do with how you use them. In theory, there is no limit to how many credit cards you should have. In practice, the answer depends on your financial circumstances.
So before you open up another credit card, make sure you ask yourself these questions.
1. What is your credit score?
You should know what your credit score is before applying for a new credit card. Unless you're applying for a credit card specifically designed for rebuilding credit, that score should be "good" or "excellent" -- that is, above 700 points.
A credit card application will usually result in a "hard inquiry" on your credit report, and this will temporarily decrease your score. While people with good credit can afford small, temporary decreases, people with low credit scores can't. What's more, you don't want to apply for a credit card unless you have a good chance of being approved.
To give you an idea of what your credit score should look like, see the following credit card approval rates from 2012:
| Credit Score | Below 620 | 620 to 659 | 660 to 719 | Above 720 |
|---|---|---|---|---|
| Approval Rate | 17.1% | 39.1% | 58.7% | 85.5% |
Data source: Consumer Financial Protection Bureau CARD Act Report.
2. When was the last time you applied for a new credit card?
If the answer is less than six months ago, then you shouldn't apply for a new credit card yet.
As mentioned above, credit card applications cause a temporary drop in your credit score. They do fall off your credit report entirely after two years, and your score should bounce back after about six to 12 months. However, having multiple hard inquiries on your report in a short time span will cause a significant drop that's harder to recover from, and an excess of credit card applications in a short time period is seen as high-risk activity by lenders.
3. Have you shopped around?
Make sure you're applying for a credit card that fits your financial needs. Decide whether you're looking for a credit card that's designed to improve your credit, help you pay off debt, provide extra rewards or cash back, or help you save money on interest, and then shop around for the best one in that category.
You'll also want a credit card that fits your spending profile. Credit cards vary greatly when it comes to approval rates, interest rates, rewards, and credit limits. If there's any chance that you'll be carrying a balance in the future, you'll want to find a credit card with low interest rates. If you're sure you won't be carrying a balance on this card but know you'll be spending a lot, you may want to focus on cards that have a reputation for offering higher credit limits and giving out generous rewards.
4. Do you plan to finance a major purchase in the next two years?
If you're planning on buying a home or financing a car in the next two years, then consider holding off on new credit card accounts. While a credit card application only drops your score marginally, every point counts when it comes to getting the best interest rates on a massive purchase like a home. You want your credit score to be in tip-top shape when you apply for a big loan, because even a slight difference in your interest rate can save you, or cost you, thousands of dollars.
5. Are your spending habits in check?
While credit cards offer some financial benefits, none of them are worth going into credit card debt. You need to be honest with yourself about your motives. If you find yourself tempted to overspend, opening a new credit card is probably not a good idea.
If you're already in credit card debt, it's almost never a good idea to open a new credit card. The exception to this rule is if you're considering a balance transfer credit card in order to consolidate your debt and pay it off at a lower interest rate, but even this route should be pursued with caution.
6. Have you made any late payments?
Your payment history makes up the largest portion of your credit score -- a whopping 35% -- so on-time payments are a crucial part of maintaining a good credit score. Each time you add a new credit card to the mix, you add another due date to keep track of. If you've made any late payments in the past few years, whether on your credit card or on other bills, you may not be ready to open up a new credit card.
7. Have you read the terms and conditions?
Pay attention to the fine print before applying for any credit card. You may find that promotional offers and sign-on bonuses have terms that disqualify you. Other important terms to look out for are late fees, inactivity or annual fees, and foreign transaction fees. Even if you don't plan to carry a balance, you should know what your interest rate is, how it's calculated, and how long your grace period is -- that's the amount of time you have to pay off your balance before interest is charged.
Keep in mind that opening a new account doesn't mean you should close old accounts. Other important parts of your credit score include the length of your credit history and your debt-to-credit ratio. Leaving old credit cards open helps in both of these areas, even when you don't use them. Ultimately, as long as you think you're financially ready for a new credit card and you do your research, opening a new account can help increase your score.
