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One of the first questions that people tend to have before entering this hobby, is whether or not their credit score is going to be hurt if they apply for new credit cards. The answer to this question can hinge on a number of factors like prior established credit history, payment habits, and a few other things. However, generally speaking, getting approved for new credits will not hurt your credit score and will usually even improve it!
This article will walk you through why getting new cards should improve your credit score.
Utilization and Payment history (65%)
The great news for people in this hobby is that the primary factors that affect your credit score are your: 1) payment history and 2) utilization. In fact, these factors are estimated to account for 65% of your credit score! For responsible credit card consumers, opening up new credit cards will only allow these factors to continue to benefit your credit score over time and here’s how.
Payment History (35%)
Payment history is the most important factor in determining your credit score. If you have paid all of your car loans, student loans, previous credit cards, etc. on time, then you’re in luck because your payment history will only continue to benefit your score over time as you add more cards to your credit portfolio.
If you have some late or missed payments then it’s going to be more of a headache for you. You’ll generally have to wait seven years for late payments to be removed, though you can always try your luck with goodwill letters and contacting your creditors. The good news is that if you can get a few approvals then your monthly payments on these new cards can help “dilute” your negative payment history and bring your payment history closer to 100% satisfactory a lot quicker.
Since payment history is so important to your score you need to realize the importance in remembering to almost make timely payments. As mentioned, maintaining responsible payment habits will increase your score over time but there’s always the risk that with more payments to remember you might be more susceptible to missing a payment (just something to think about).
Still, the important take-a-way is that the most important factor for your credit score, payment history, will be positively affected as you open up new credit cards and responsibly make your payments on time.
The second most important factor for your credit score is Utilization. This is also known as your “credit-to-debt” ratio. You can figure out your utilization by dividing your outstanding balance by your overall credit limit. For example, if you have a credit limit of $30,000 but have $10,000 worth of debt, then you divide 10,000 by 30,000 and you get a utilization score of 33%.
There are two things looked at with this score: your overall utilization and the specific utilization on each card.
This considers every line of revolving credit that’s currently open. This percentage needs to be as low as possible. Generally, under 10% is thought to be excellent but I keep mine at about 1% to keep my score as high as possible and to avoid paying interest on my accounts.
Opening up new credit cards can create a snowball effect that benefits your utilization and ultimately your credit score. Here’s how this snowball effect works.
First, it becomes significantly easier to keep your utilization low once you get approved for additional cards. Let’s say you had one credit limit of $5,000 and $1,000 of outstanding debt. Well, your utilization would be 20%. If you could only get approved for one card with an additional $5,000 credit limit you could cut your utilization down to 10%, increasing it from “good” to “excellent.”
This decrease in your utilization then leads to a bump in your credit score but the effect doesn’t stop there.
When it’s time for you to apply for your next credit cards the banks will see: 1) an improved credit score and 2) that other banks found you to be a low credit risk since they offered you additional credit.
This will lead to additional approvals with often even higher credit limits, which of course leads to more easily maintained lower utilization. So now your $1,000 of debt may only account for 5% of your utilization or potentially even less. The cycle then repeats itself and goes and on, continuously lowering your utlliization, building up your payment history, and ultimately increasing your credit score.
Your overall utilization is more important than the specific utilization of each card but having a high utilization on a single card can still hurt your credit score, especially if you don’t have many credit accounts. Your specific utilization for each card needs to be 30% or lower for optimal results, although there’s usually more wiggle room for specific utilization than overall utilization.
Where having a high utilization on a single card can really hurt is with specific banks. Some banks may not want to extend you additional credit if you have a high utilization on a single card issued by them so it’s always a good idea to avoid having a maxed out (or close to maxed-out) card even if you don’t think it’s significantly damaging your score.
Getting new credit cards can help you indirectly with your specific utilization because some banks like Chase will allow you to transfer credit lines from other cards. So if you were near 50% on a Chase Freedom card and got approved for a Sapphire Preferred, you could also transfer some credit from the Sapphire line to the Freedom line to decrease the utilization.
The takeaway on this is that at least 65% of what determines your credit score should be positively affected by getting new credit cards. This means that on average the benefits of getting new cards will outweigh the negative effects and your credit score should rise in the long-run.
We can’t discuss the good without the bad. Even though the benefits to opening up new credit cards outweighs the negative factors, here’s a look at some of the factors that can hurt your score when applying for new credit cards.
Two factors that will negatively affect your score
The things that are going to hurt you are: 1) credit history/average age of accounts and 2) new accounts.
Credit history/Average age of accounts (15%)
Your credit history aka average age of accounts (“AAoA”) is the factor most detrimental to your score when getting new credit cards. Applying and getting approved for new credit cards will (almost) always bring down your average age of accounts and thus work to counteract the benefits to your credit score.
How much damage will be done depends on a lot on what your current credit portfolio looks like. If you have some established accounts from years ago, then a new credit card will only have a minimal impact. If you have a thin profile and do an “app-o-rama” where you apply for 3-5 cards at once, you’re AAoA will take a serious hit and lower your credit score, at least temporally.
Thus, while a single new credit card shouldn’t hurt you too much (if at all), it all depends on your personal credit history in terms of how much damage will be done with multiple cards.
What can you do to limit the damage?
If you have a thin credit report, there’s not too much you can do to protect your average age of accounts from being hurt once you start applying for tons of new credit cards. However, there are a few things that can help.
Adding yourself as an authorized user to older credit cards. The bad news is that this will often show up as a new account on your credit report. Still, adding yourself to one or two old cards can provide you with a decent boost.
The second way is to utilize small business credit cards. Most business credit cards do not show up as new accounts on your personal credit report and so they won’t lower your average age of accounts.
New Credit (10%)
The second way applying for new credit cards can negatively affect your score is buy impacting your new credit category. New credit accounts for 10% of your credit score. The main factors in this are hard-pulls and the opening of new accounts.
Contrary to what many believe, hard pulls aren’t a huge knock on your credit. Usually, a new hard-pull will bump your score down 2-5 points but only temporarily. The negative effect of a hard-pull tends to diminish within about 60 days so they don’t really present long-term trouble for your score.
New accounts can hurt your score a little more, however.
One way credit cards hurt your score is if you pursue many new lines of credit in rapid succession. This makes you look desperate for credit to banks and therefore more of a credit risk. Getting one new card shouldn’t look bad but getting 5 cards in one week will cause some damage to your score. Thus, if you plan on pursuing multiple cards it makes sense to be as patient as possible when planning out your applications.
Note: if applying for a mortgage loan or car loan you need to be extra sensitive to the effect of new accounts on your credit.
An additional way that new accounts damage your score is that they lower your average age of accounts. Again, this is not a major concern for people only considering applying for a small amount of cards, especially if they have an established credit history.
One thing to keep in mind if you’re planning on applying for several cards is that it is not uncommon for your credit score to dramatically rise and fall during the process. As hard pulls, new accounts, new utilization percentages, and payment history change, they are all calculated in unique ways and given different weight at different times.
Your credit score could dip 30 points in January and then rise 40 points in February, only to fall 8 points in March and rise 2 points in April. The important thing to remember is that if you responsibly manage your payment history and utilization (worth 65%) your score should always rise in the long run.
Credit Mix: A neutral factor?
Credit Mix (10%)
This is considered to be the least important factor for your credit score, so I’m just including it for the sake of completion.
Credit mix considers both the number of credit accounts and the variety of them. For most people new to credit cards but currently paying on an auto loan, student loans, mortgage, etc., their score should benefit with new credit card accounts. However, in the end, this factor probably isn’t going to affect your credit score too much either way, so I wouldn’t make it a deciding factor when choosing whether or not to apply for a credit card.
At least 65% of what affects your credit score should be benefited with new credit cards. 10% may or may not be benefited, and only a remaining 25% may be negatively affected by pursuing new cards.
Therefore, on average, there’s more benefit than harm done to your credit score when you apply for new cards and so long as you’re responsible, you shouldn’t worry about damage to your credit score when applying for new credit cards.
H-Town based Attorney turned credit card rewards expert. Founder of UponArriving.com.