Does Opening a New Credit Card Hurt Your Credit Score?

Does Opening a New Credit Card Hurt Your Credit Score?

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Your credit score can be something that makes things either very easy or very difficult for you.
That’s why so many people try to study up on how they’re credit score is calculated and how the money moves they might make could affect their score.

Does Opening a New Credit Card Hurt Your Credit Score?

If you’ve done some homework on credit scores, then you know one of the FICO score factors is new credit, which accounts for 10% of your score. Another 15% comes from length of credit history, including the age of your newest account. So together, opening a new credit card would have a negative effect on factors that account for 25% of your FICO score.
Let’s walk through the process of getting a new credit card to illustrate how this all works.

The first step a bank takes when you apply for a new credit card is to make a hard credit inquiry, which means it takes a look at your credit report. A hard inquiry will negatively affect the new credit factor of your FICO score, but the impact will be small if you only have one or two credit inquiries on your report within the past 12 months. After all, it’s OK to apply for a couple of credit cards per year, but if you’re applying for dozens of them, lenders may think you’re irresponsible, desperate for credit, or both.

If the bank approves your credit card application, you’ll see the account show up the next time you check your credit report. This also negatively impacts the new credit factor. FICO will ding your score based on how long it’s been since you opened a new account and how many new accounts you have. (Side note: FICO is unclear on what it considers a “new account.”)
On top of all that, a new credit card will negatively impact the length of credit history factor of your credit score. Your length of credit history considers the age of your oldest account, the age of your newest account, and the average age of all accounts. The older, the better. Opening a new card will reduce the age of your lowest account and your average account age, thereby lowering your credit score.

But this misses the big picture…

Based on all that, you might think opening a new credit card is a bad idea.
The important thing to remember is that the two most important factors in your credit score are your payment history and your credit utilization ratio — the percentage of your available credit that you’re currently using. Combined, they account for 65% of your credit score, and a new credit card could help improve your credit utilization, which accounts for 30% of your FICO score.

Applying for a new credit card shouldn’t have any impact on your payment history, because you should be making your payments on time and in full every month.

On the other hand, a new card could have a major positive impact on your credit utilization ratio. This ratio is simply your total outstanding credit card debt divided by your total available credit. The lower the ratio, the better.
As an example, let’s say you only have one credit card with a limit of $10,000 and a balance of $2,000. Your credit utilization ratio is 20%. But if you apply for a new card and get approved for an additional $10,000 credit line, your credit utilization ratio will drop to 10%. In other words, assuming your spending habits don’t change, you’ll cut your credit utilization in half. That can more than offset the negative impact of a hard credit inquiry and a decline in your length of credit history.

The final factor in determining your credit score is credit mix, which accounts for 10% of your score. If you already have a credit card, applying for a new credit card shouldn’t have an impact on this factor. If you don’t already have a credit card, then a new credit card account on your report will have a positive impact on this factor, further offsetting the negative effects of opening a new account.

Good habits lead to good credit

It can be easy to nitpick and get lost in all the details of how your credit score is calculated, but here’s the important thing to remember: FICO rewards responsible credit usage.

Yes, applying for a new credit card could temporarily ding your credit score. But in the long run, it should provide a boost — as long as you use your new credit responsibly.

That means making your payments on time and staying well below your credit limits. As long as you’re diligent in those two areas, then getting a new credit card won’t damage your credit score in fact it could even improve your credit score!
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