If you are thinking about applying for a new credit card, it might be wise to take a pause and consider how it might impact your credit score. Your personal credit report is the cornerstone of your financial security, and damaging it unintentionally could limit future opportunities available to you. Your credit health is tantamount to your overall financial situation.
So, does applying for a credit card hurt your credit score? To know the answer to that question, it’s a good idea to better understand what information is included on credit reports and how credit scores are calculated using that credit information.
Credit Information Included in Your Credit Report
Three major credit bureaus compile credit reports used by lenders to determine approval or denial of a credit application. Most every lender and credit card issuer reports your account information to at least one credit bureau. Your credit history is constantly updated to make your credit file as accurate as possible.
The credit information included in credit reports can be divided into four different categories:
Personal Identifying Information
The PII section of your credit report includes information to connect you to your file, like your name, address, date of birth, Social Security number, and employment information gathered from your previous credit applications. This information is not used by lenders to determine your eligibility for credit or to calculate your credit score.
Credit Account Information
When lenders report a new credit card account or a new loan, all the information about the accounts will show up in this section of your credit report. Account information includes the type of account (i.e., credit cards, mortgages, car loans, online payday loans, student loans), the date the account was opened, the credit limit or loan amount, account balances, and your payment history.
Each time you complete a new credit card application, you authorize the lender to pull a copy of your credit report, which creates a hard inquiry on this section of your report. This part of your personal credit report is why credit card applications have an impact on your credit score even if an account is not opened.
Public Records and Collections
To complete your credit report, each of the credit bureaus obtains all public records from state and county courts pertaining to bankruptcy filings. In addition to public records, this section contains all collection accounts opened to handle debt you’ve defaulted on.
How Credit Scores Are Calculated
Credit scores are calculated based on all the information provided in your credit profile. Credit scores are far more varied than credit reports as there are so many credit scoring services. But most of them calculate your credit score using a similar breakdown of how much each section of information in your credit report will impact your score.
These are typically the multiple factors that affect your credit score in order of importance:
Payment History – 35%
Payment history is the most impactful factor in calculating credit scores. It covers all the payments you’ve made on all your credit accounts in your entire credit history. Late payments and missed payments will hurt your credit, while paying on time helps build credit.
Credit Debt Owed – 30%
Your total credit owed compared to how much available credit remaining is your credit utilization rate which is an important factor in determining your credit score. You want your credit utilization ratio to be as low as possible so you don’t have a disproportionate amount of debt compared to your total available credit.
Credit History – 15%
The credit history portion of your credit score calculation considers how long your credit accounts have been established, including the age of your oldest, newest, and average account. Having a more established credit history is helpful for a good score.
New Credit – 10%
All your credit inquiries and the opening of new accounts will be included here. Filling out multiple applications and opening too many new accounts within a short period of time could represent a greater risk to lenders, so it negatively affects your credit score.
Credit Mix – 10%
Credit mix considers the variety of account types you have on your credit report. It’s good to have a healthy mix without too many in only one category. Account types can include credit cards, installment loans, retail accounts, home loans, and student loans.
A Hard Inquiry vs. A Soft Inquiry
Every time anyone runs a credit check, it will create a single inquiry. All hard inquiries and soft inquiries show up on your credit report. But not all inquiries hold the same weight in a credit check, and not all of them will negatively impact your credit score.
A soft inquiry will appear on your credit report when someone runs a credit check for reasons unrelated to a direct application for credit. Soft inquiries can result from a lender or credit card issuer checking your credit report for pre-approval on lending services. Checking your own credit report will appear as a soft inquiry as well.
Soft inquiries don’t affect your credit score and do not qualify as a risk factor when lenders check your credit report. Hard inquiries have the most significant impact on your credit score as they only occur with legitimate credit card applications. A hard inquiry affects your credit score, whether your credit card application is approved or denied.
How Hard Inquiries Impact Credit Scores
Too many hard inquiries within a short period of time flag you as a higher-risk borrower to a lender checking your credit report. Applying for a credit card a few too many times only to be denied could cause a drop in your credit score.
Even if you are successful in each credit card application you make, opening too many credit card accounts at once could cause a temporary plunge in your credit score. A general rule to follow when it comes to hard inquiries is to avoid them until necessary, i.e., only apply for new credit when you absolutely need to.
How Long Does a Hard Inquiry Remain on your Credit Report?
A hard inquiry can stay on your credit report for up to two years. However, they typically affect credit scores for only a year. How long and how much hard inquiries negatively impact your credit score depends on the unique circumstances of your credit history and how many credit card applications you completed.
How To Build Your Credit History
The good news is that a drop in your credit score because of a credit card application is usually a temporary setback that you can bounce back from easily. We have some specific advice for you about how you can build your credit history back up after too many hard inquiries.
You can work your way up to a high credit score by consistently following this specific advice for responsible credit usage:
Check Your Credit Regularly
Get in the habit of regularly checking your various credit scores and credit reports. You can get a free copy of your credit report once a year, but you can check out your score through calculating services as often as you like.
By monitoring your credit with consistency, you can catch errors and mistakes that are bringing your score down right away and rectify them. Remaining up to date with the state of your credit score will help you understand what other factors could be contributing to a dip in your score.
Use a Secured Credit Card
If you want to build upon your credit history but don’t have a solid score to qualify you for a traditional credit card, you could apply for a secured credit card. A credit card that is secured could offer you guaranteed approval as long as you have the cash to cover the credit limits.
A secured credit card affects your credit history with each billing cycle, allowing you to improve your credit score with each payment until you are able to qualify for a regular credit card.
Late payments on your credit card bills will consistently harm your score. The best thing you can do to recover from a temporary drop in your credit score is to pay your bills on time to have an impeccable payment history.
Your payment history holds the greatest weight in calculating your credit score, so continuously paying your credit cards on time is the most helpful action you can take to improve your score.
Only Apply for Credit When Necessary
The number one rule for avoiding unnecessary inquiries on your credit report is only applying for a new credit card when you need it. Don’t take on more credit unless you know you are ready to take on new debt and have a credit score good enough to be approved. Utilize pre-approval services to your advantage to be more sure about your qualification before applying for a credit card or loan.
It is crucial to keep in mind that when you are applying for a new credit card, you are agreeing to take on increased total credit limits, which means you will have significantly more available credit. A higher credit limit requires increased responsibility to ensure you do not fall into a debt trap. Handling the new debt taken on irresponsibly will just result in further damage to your credit score.
The bottom line is that while other factors impact your score more, applying for too many credit cards too close together can hurt your credit score. The lender checking your score will always view too many inquiries as a credit risk. This is why every qualified professional suggests only applying for a credit card when you need it and are sure you have a score good enough for lender approval.