Does Getting New Credit Cards Hurt Your Credit Score?

One of the first questions that people tend to have before jumping on new credit cards is whether or not their credit score is going to be hurt if they apply for multiple 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.

Tip: Use WalletFlo for all your credit card needs. It’s free and will help you optimize your rewards and savings!

Utilization and Payment history (65%)

The great news for people who want to apply for a lot of credit cards 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 always make timely monthly 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.

Utilization (30%)

The second most important factor for your credit score is utilization (how you pay off your credit card bills). 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.

Overall utilization

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 4% 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.

Specific Utilization

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

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.

Related: Does Closing Your Credit Card Hurt Your Credit Score?

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.

Hard-pulls

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 to 90 days so they don’t really present long-term trouble for your score.

New Accounts

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%)

Credit mix 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.

Conclusion

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. 

What Are The Best Secured Credit Cards in 2016?

[Offers contained within this article may no longer be available]

Secured credit cards are one of the best ways to build up your credit score if you find yourself in the unfortunate position of having a low credit score or just a razor thin credit profile. Here is a list of what I believe are the top 5 secured credit cards out there in 2016.

Tip: Use WalletFlo for all your credit card needs. It’s free and will help you optimize your rewards and savings!

1. Discover it® Secured Credit Card

secured-card
  • No annual fee
  • Minimum deposit is $200
  • No late fee on first payment and paying late wont increase APR
  • Rewards (see below)
  • Reports to all three credit bureaus
  • Free FICO score

If you’re planning on getting into the rewards game, this is a great way to break into it, as it’s rare for a secured credit card to offer rewards (and good ones at that). This card earns 2% cash back at restaurants & gas stations on up to $1,000 in combined purchases each quarter and 1% cash back on all other purchases. At the end of your first year (as a new cardmember) Discover doubles all the cash back you’ve earned, too!

Another thing that’s great about this card is that after 12 months you Discover will evaluate whether or not to approve you for additional credit and if you’re approved they’ll transition you into the standard Discover It. The drawback to this card is that it does have a high APR at a variable 23.24. But it can’t be reiterated enough — if you’re at the “repair” stage of building your credit you should not never even think about carrying a balance.

2. Capital One® Secured MasterCard®

CAPITAL ONE SECURED
  • No annual fee
  • Minimum deposit is $49, $99, $200
  • Variable  APR 24.99%
  • Credit line increase possible
  • No foreign transaction fees
  • Reports to all three credit bureaus

This is one of the most popular secured credit cards out there on the market. It reports to all three credit bureaus so it’s a great way to build your credit profile and there’s no processing fees to go along with no annual fee and no foreign transaction fees. Furthermore, if you qualify for a low deposit, you’re only out as little as $49.

The drawback is the high interest rate of a variable 24.99%, but you should be dead set on paying your balance in full while you’re building your credit anyway, so that shouldn’t affect you too much. Another drawback is that this is one of the more difficult difficult secured credit cards to get approved for. According to NerdWallet, if you have low income (below $10,000), high rent relative to income, or bankruptcies showing on your report then you may have some issues in getting approved.

3. nRewards® Secured Credit Card – Navy Federal Credit Union

Navy-Federal-Secured-Credit-Card-300x189
  • No annual fee
  • Minimum deposit $500
  • APR 9.24% to 18.0%
  • No foreign transaction fees
  • Reports to all 3 credit bureaus
  • Rewards

This is one of the best secured credit cards the problem is that you need some form of military connection in order to be eligible. With its potential for a low APR, it can be a great asset for those consumers who think they might carry a balance from time to time. It also has a decent rewards system where you earn 1 point per dollar spent.

Here are some examples of how you can utilize the rewards:

  • 3,500 points for $25 gift card from Applebee’s® or Outback Steakhouse®
  • 5,000 points for $50 gift card from Best Buy® or Macy’s®
  • 7,500 points for $75 Navy Federal Visa® Awards Card or The Home Depot® gift card (That’s a one cent per point redemption for Visa gift cards — not bad for a secured credit card).

4. DFCU Savings Secured Visa Platinum Card

  • No annual fee
  • Minimum deposit $250
  • Variable 7.24 percent
  • No foreign transaction fee
  • Reports to all 3 credit bureaus
  • Rewards

This secured credit card has an amazing interest rate, low deposit, no annual fee or transaction fees, and decent rewards, too.  According to Beverly Harzog (credit expert), your approval does not hinge entirely on your credit worthiness. Although, DFCU conducts a credit check, they do this for identification verification purposes. There are reports of others being denied despite having decent credit scores, however, so your mileage will vary.

The reward system offers you 1 “Flex point” per dollar spent. You can learn more about the Flex Point rewards system on their website here.

The drawback is that you have to be a member of the DFCU in order to qualify for the card. If you’re an employee of the Department of State membership is free, otherwise you can the American Consumer Council for $15 (the membership lasts a lifetime).

5. USAA Secured Credit Card (Visa and Amex)

USAA SECURED CREDIT CARD
  • Annual Fee $35
  • $250 minimum deposit (accrues interest)
  • Variable APR 10.15% to 20.15% APR
  • No foreign transaction fee
  • Reports to all 3 credit bureaus

This is one card that I believe is great for getting yourself out of a credit bind when you have a host of negative remarks. I know first-hand of individuals who were approved for this card, despite having several major negative marks and scores down in the lower 500s. That’s not to say you’re guaranteed approval of course. The $35 annual fee is a bit of a drag and I’d personally go for the nRewards® Secured Credit Card first but this isn’t a bad option. And as always, USAA has renown customer service so if you value that, you can’t go wrong with this card.

Other secure credit cards

Here’s a comprehensive list of a ton of other secured credit cards ranked by Beverly Harzog. I reviewed the list and think it’s a great and accurate resource for researching  secured credit cards. You can also check to see what the Doctor of Credit has to say about secured credit cards here.

If you apply for any of these cards and get denied or are weary of getting denied, consider checking with your local bank or credit union for alternative options. Many times, smaller banks and credit unions will be more accommodating, especially if you have a good pre-existing relationship with them (checking accounts, savings accounts, etc.).

Step 1: Getting Your Credit Right

The cornerstone of award travel is your credit score. Without at least a decent credit score, you’re going to get hit with denials on your credit card applications left and right and it’s going to be an uphill battle just to get approved for some of the most basic travel rewards cards. Thus, if you want to get into award travel, your first priority is making sure that you have decent credit.

Why is your credit score important? 

While being able to be approved for some of the most valuable credit cards is certainly a major plus of having a good credit score, there are far more important reasons for maintaining a solid credit score.

Having a poor score can costs you thousands of dollars in interest for loans and insurance, hinder your employment prospects, make it more difficult to open utilities, cell phones, etc., and ultimately keep you held down.

I highly suggest you read my article on how your credit score can affect your daily life to begin to instill the importance of having a good credit score.

Tip: Use WalletFlo for all your credit card needs. It’s free and will help you optimize your rewards and savings!

What exactly is your credit score? 

If you’re not very familiar with credit scores, I suggest you read my article: Beginner’s Guide to Credit Scores and Reports.

In that article, you’ll learn about the basics regarding your credit score and also find a lot of other links that provide insight into common questions about credit scores. For your reference, those links along with a few other helpful inks are listed here: 

If you take the time to read and understand all of the links above, you’ll have a pretty in-depth understanding of the basics of how your credit score is determined and how getting new credit cards factors into the equation. 

Checking your credit score

There are a few ways that you can check your credit score for free or for a small fee. The most readily used credit scores are FICO scores, so those tend to be the most important to find out first.

There are a few ways to get your FICO credit scores…

  • Freecreditreport.com offers you a $1 seven day trial where you can view your FICO Experian score. If you just want to quickly view one of your FICO scores for cheap, then I highly recommend this website. (Just know that you’ll need to call in to cancel and sometimes the reps can be annoying with their persistent retention offers.) You can re-enroll in this $1 seven day trial each week and get an update every 7 days.

Now-a-days banks and credit card companies are offering free FICO scores so if you have an account with any of the following be sure to see if you’re eligible for a free FICO score.

  • American Express (Experian)
  • Barcalys (Trans Union)
  • Capital One
  • Citi (Experian)
  • Discover (Trans Union).

You can also get what’s dubbed a “FAKO” score, which is often close to being accurate to your FICO scores (though sometimes they can be off by quite a large margin).

There are several ways to get your FAKO scores:

  • Credit Karma provides you with both your Transunion and Equifax score
  • Mint.com will provide you with your Experian
  • Credit Sesame will provide you with Trans Union
  • Quizzle will provide you with Equifax or Trans Union

Personally, I really like Credit Karma. It gives me weekly updates and has a nice mobile app that makes checking your credit score a breeze. Credit Karma also provides you with a full report and the means for disputing errors on your report.

I’ve personally had errors and updates made to my credit report going through Credit Karma and it’s been great. Finally, while your experience may differ, my FAKO score on Credit Karma has always been identical or nearly identical to my FICO scores (though that won’t always be the case). 

What credit score do you need for award travel?

I personally think you should wait until you break the 700s before pursuing some of the premier travel rewards cards but it’s not all always solely about the credit score. For example, if you’ve got a “perfect” score of 720 but practically no credit history, you may get hit with denials for certain cards.  

Below is a highly generalized (and relatively conservative) guide for credit scores needed to get into award travel. Please note, these are by no means strict thresholds for approvals but a quick read of them should help you find out where about you fall in the credit score spectrum. 

If you want to take a look at some resources to research what kind of credit score got approved for different cards check out the following resources: 

You also read my article on Chase Sapphire Preferred approval odds.

Again, keep in mind that there is a lot more than a mere score that goes into many credit card approvals so just because your odds appear to be bad or great, you will not know the outcome of your application until after you apply. 

680 and below

If you’re at 680 or below, your best bet may be to seek out secured credit cards to build your score or to wait for your score to raise as you make more on time payments and lengthen your credit history.

You can look into cards like the Discover IT secured, Capital One® Secured MasterCard®, etc. and if you have trouble getting approved for those (very possible if you’re stuck in the mid to low 500s), then contact your local bank or credit union for further options, as they often have secured credit cards which are easier to get approved for. Here’s an article on some of the best secured credit cards out there right now.  

Another option to consider is going for store cards or trade lines. These are cards offered at places like Wal-Mart, Macy’s, etc. Sometimes you can even get these cards without incurring a hard pull with the Shopping Cart trick

If you’re close to 680, sometimes you can get lucky and snag a card like the Chase Freedom® Card‎ but most of the time you’re going to struggle to get approved for those cards, so it’s generally better to be patient and wait for your score to get closer to 700.

680 to 720 — You Might Ready for award travel 

Once you get into the 680 to 720 range, you might be ready to start applying for some rewards cards, just proceed with a bit of caution. The closer to 680 you are, the more established credit history you’re going to need to be approved for cards. If you’re more the conservative type, then you might want to wait until you at least break the 700s to start applying. 

The cards you’d be considering at this level are those like the Chase Freedom® Card and The Amex EveryDay® Credit Card to get you started. As you get closer to 720 you can definitely take a chance on some of the better cards, especially if you have some payment history established with the bank you’re going to apply with or other lines of established credit.

720+

As long as you have a little bit of credit history (3-5 years ideally) and are above (or close to) 720 you have a good shot as some of the great cards like the Chase Sapphire Preferred® card, Citi Thankyou cards, and American Express charge cards. Once you hit this mark, you should feel good when applying for the vast majority of travel rewards cards.

Occasionally a bank will ding you for certain reasons (e.g., too many new accounts, reached credit limit, limited credit history, low income, random obscure reason, etc.), but I’ve got something like a 98% success rate on credit card applications with a score above 720. The higher up in the 700s you go, the better your odds get (you might eventually hit a point of diminishing returns near 800), but from my experience anything in the range of 720+ seems to get the job done.   

Tip: Use WalletFlo for all your credit card needs. It’s free and will help you optimize your rewards and savings!

Improving your credit score

I’ll eventually get around to writing in-depth articles on ways to improve your credit score but here’s some basic information that can help you if you’re just starting out.

How is your credit score determined?

The first thing you need to know is how your credit score is determined. Your credit score is determined by the following factors.

  • Payment History (35%)
  • Utilization (30%)
  • Credit History (15%)
  • New Credit (10%)
  • Mixed Credit (10%)

The two biggest factors are your payment history and your utilization (credit-to-debt ratio). They amount to 65% of your score so it makes sense to attack these things first.

Pay off that credit card debt!

The first thing you need to do is try to pay off all of your credit cards or revolving credit lines. Do whatever you can possibly do to pay down your credit cards ASAP. If you’ve got high utilization you really need to put some effort into reducing it because credit card companies are going to see you as a credit risk and your score is going to suffer.

In a perfect world, you’d rely on your income to quickly pay off your cards and get your utilization as close to 0% as possible. However, in  some circumstances it’s just very difficult. One solution you can always consider is opening up an installment loan.

Even if you have suspect credit, if you have a good relationship with a bank or credit union, you might be able to pull out a personal installment loan that you can use to pay off or pay down your credit card debt. Since the loan is in installment form, that means it won’t affect your utilization. Also, if you already have a personal loan with revolving debt, inquire with the bank about converting that to an installment loan. My friend lowered her revolving debt by $6,000 overnight be employing this trick and it catapulted her credit score into the 700s.

Do your research on negative marks on your report

If you have any late payments or derogatory marks you’ll now need to research how to get those removed off your credit score. Try not to get too discouraged if you’re facing a lot of late payments. When I first started, I’d slipped up big time and got hit with 6 late payments, bringing my score down to the 500s! A lot of sources said I didn’t have any hope for getting all six of these late payments removed but I got all six of these payments removed and my credit score ended up touching the 800s! So don’t give up! 

Consider the secured credit card route

If you’re not able to pay down your credit cards in a reasonable amount of time and have some negative marks on your report, then consider opening up a secure credit card. Basically, you deposit money to a bank and they open you up a credit line for that amount. You use this account to make timely payments over time and eventually your score will go up! It might take some time, but I know of several people who have had pretty good success going the secured credit card route.

Just take your time, do your research, and just don’t give up!

Make sure you are mentally prepared…

You need to possess the discipline to make financially responsible decisions with your credit cards to be successful in award travel. The first time I got approved for a huge credit line it was a bit of a shock to go from having a couple of thousand dollars at my disposal to all of a sudden having access to over $20,000! For some people, being granted instant access to $20,000+ in a matter of seconds can open up room for them to make poor decisions.

The whole point of award travel is to travel at a fraction of the cost that it would require otherwise. If you run up your credit card balances and end up paying large amounts of interest every month you’re going to cut into your savings and be defeating the purpose of travel hacking in the first place.

I really think that if you want to get the most out of award travel you need to be in a place where finances are not a constant worry. Whether that be worrying about steady income, mounting medical bills, spending habits, whatever. You should feel confident in your ability to apply budgeting to your spending habits even if you’ve got the ability to buy just about anything you want or think you’ll need.

I’m not saying you have to be wealthy — I think even “broke” college students can get into award travel. I’m just saying it’s a good idea to be honest with yourself before it’s too late. For example, If I had found out about this hobby 10 years ago, I’d probably still be paying off credit cards because I just wasn’t mature enough to make good financial decisions. Now, I’ve made enough financial blunders to learn my lessons and it’s a totally different story.

So once you get your credit score in order or at least come up with a plan to get it right and do a bit of self-evaluation to make sure you’re ready for this hobby, it’s time to get informed!