Yes, applying for a credit card hurts your credit score -- temporarily. But in the long run, it can boost your credit score if you manage that new credit well.
There are a few ways applying for credit cards can affect your credit. Once you've learned more, you'll see that credit card applications are really nothing to worry about.
Your credit score is calculated based on several scoring categories. When you open a new credit card, it has a negative impact on two categories:
The math is simple enough: Opening a new credit card affects factors equaling 25% of your FICO® Score (the most widely used type of credit score). That doesn't tell the whole story, though. After all, it wouldn't make sense for lenders to use a system that discourages consumers from opening new accounts.
While a new credit card can hurt your credit score some, it's unlikely to cause a big drop. You shouldn't let it dissuade you, because this small hit is nothing compared to the value the best credit cards provide. There are also two factors responsible for a much larger portion of your credit:
If you're doing well in these categories, then your credit should be fine. A new credit card can even help if your credit utilization ratio is too high. Let's say you have one credit card with a balance of $5,000 and a credit limit of $10,000 -- your credit utilization would be 50%, on the high side. If you open another card with a $10,000 credit limit, it would cut your credit utilization in half, and almost certainly raise your credit score.
When you apply for a credit card, the card issuer reviews your credit history. This puts what's called a "hard credit inquiry" on your credit file, and affects the new credit category that's used to calculate your credit score.
New credit matters because there's a correlation between your number of credit applications and your risk of defaulting on debts. FICO has found that consumers with at least six hard inquiries on their credit reports are up to eight times as likely to declare bankruptcy as consumers with zero inquiries.
A credit inquiry is a request for information on a consumer's credit file. There are two types: hard inquiries and soft inquiries.
A hard credit inquiry is triggered by a credit application. Examples include credit card or loan applications, requests for a credit limit increase, and in some cases, applying to rent an apartment. You must give your permission for any party to perform a hard inquiry.
This type of inquiry, as we've seen, affects your credit score. It's not a large impact -- for most consumers, five points or fewer. However, multiple inquiries can bring your credit score down more.
Hard inquiries stay on your credit file for two years, but only affect your FICO® Score for one year.
A soft credit inquiry doesn't affect your credit score. This type of inquiry doesn't provide as much information as a hard inquiry, and creditors don't need your permission to perform a soft inquiry.
While there are many potential reasons for a soft inquiry, here are some examples:
Your credit score will probably go down a bit from opening a credit card, but there's no reason to let that stop you. When used well, a new card can improve your credit and help you qualify for lower interest rates on mortgages, auto loans, and any other financing you may need.
If you want to boost your credit card knowledge before getting a new card, check out how credit cards work for everything you need to know.
We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team. The Motley Fool has a Disclosure Policy. The Author and/or The Motley Fool may have an interest in companies mentioned.
The Ascent is a Motley Fool service that rates and reviews essential products for your everyday money matters.
Copyright © 2018 - 2021 The Ascent. All rights reserved.