Odds are, you know that applying for a credit card is one of the first steps toward establishing your credit history, but you’ve probably also heard that doing so can ding your credit score. As a credit builder, you seem to be stuck between a rock and a hard place. But are you really? How much will those credit card applications really hurt you, and is there a way to lessen the blow?
What is a FICO score?
Your creditworthiness can be expressed as a FICO score. FICO scores are a standard credit rating system used to measure your ability and reliability in paying off debts. Scores range from a low of 300 to a high of 850 and are determined by the Fair Isaac Corporation, a credit scoring company. Scores result from the consideration of the following five categories of data from your credit report: payment history (35%), amounts owed (30%), length of credit history (15%), new credit (10%) and types of credit used (10%). Applications for credit cards fall under the new credit category.
What’s the damage?
One additional voluntary credit inquiry generated by a credit card application for new credit may take anywhere between zero to fewer than five points off of your FICO score, according to myFICO. While this seems minor compared to the 850 possible points in a FICO score, applying for credit cards can be more noticeable – and thus more harmful – to those with a limited credit history. It will also hurt you more if you send in several credit card applications at once, as you may be viewed as a greater liability to lenders. This appearance can’t necessarily be expressed numerically.
Furthermore, beyond simply applying for new credit cards, if you are approved for and open multiple accounts within a relatively short time frame, you’re putting your credit score at risk once again. Too many new accounts will decrease your average account age, thus lowering your credit history and negatively impacting your score.
What should you do?
Now that you know what’s at stake, you’ll want to minimize the damage to your credit score. You likely can’t (and shouldn’t) avoid applying for credit cards entirely – especially because they’re such a crucial part of building your credit score and history – but you can avoid applying for credit cards irresponsibly.
Research the best credit card for you before applying. If you end up only applying for one card, your score will be impacted less than if you applied for several – particularly all at once.
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