Looking at a new credit card? Don’t consider it too lightly. When you go through the card application process, you generally authorize the lender to get a copy of your credit report. This is normal, but in applying for that credit card, you may ask: what’s the impact on my credit score?
The credit inquiry
Your score is affected by a credit inquiry done by the lender. In applying for a new credit card, you are opening up a new line of credit, which represents greater credit risk for the company giving you the card. They want to know how reliable and creditworthy you are, so they can trust you with business. They look at your credit score, or FICO score, through that credit inquiry. The higher your FICO score, the less of a risk you impose—and the better chance you have of getting the card.
Generally, that inquiry can ding your FICO score by a few points, generally 3 to 5. In some cases, it can be more, but it may be more helpful to think of this in the context of FICO score percentages.
The affected percentage
Truth is, applying for new credit makes up only 10 percent of your FICO score. More important factors are being on time with your credit repayments and staying well within your available credit, since these two categories make up more than half of your score. But let’s take a closer look at the full percent breakdown of a FICO score:
- 35 percent payment history, particularly the timeliness in payments.
- 30 percent credit utilization, or the amount of credit you have used compared to how much credit you have available. If you have charged $500 on a credit card that has a limit of $1,000, your utilization comes to 50 percent. It’s best to keep it lower.
- 15 percent length of credit history; this factor doesn’t just mean the oldest age of your credit accounts but also the most recent and the average age across accounts.
- 10 percent diversity of credit used; whether you have revolving loans such as credit cards, installment loans such as mortgages and auto loans, or finance company accounts, it’s good to have a mix. It shows that you can handle multiple levels of credit at once.
- 10 percent new credit
Why the 10 percent matters
In sum, an inquiry will lose you a few points in one of the smallest categories on your FICO score. Even though that isn’t too much, you don’t want to see those points decrease even more by applying to several other credit cards at once. Even if you want to rally behind a few credit cards with the best rewards in order to save money, it’s better to do so gradually.
This is especially true if you have a short credit history. Without a long standing reputation, you pose more of a risk to a credit card company and new credit is considered more cautiously.
Closing that new credit card would make things worse
But let’s say you decide to apply for three credit cards and you get them. If you start slipping on any payments and you see your FICO score drop, closing a credit card will not help your score. In fact, it will hurt it more. By having more available credit, you keep your credit utilization ratio low. The lower it is, the better your FICO score. If you suddenly get rid of a credit card without any planning, you’ll get a higher utilization ratio, which affects 30 percent of your FICO score.
In the long run
Like most things, your FICO score changes in time. You can redeem the lost points from the inquiry in a matter of 6 months if you’re on top of your payments. As you long you stay timely, your credit history will build up and your score will improve. This is important beyond applying for credit cards, particularly if you need a small business loan someday.
Handing out credit card image via Shutterstock