How applying for credit cards affects your credit score

HOW APPLYING FOR CREDIT CARDS AFFECTS YOUR CREDIT SCORE

Whether you’re new to credit, a bit of an expert, or you’ve been investigating ways to enhance your credit score, the chances are you’ve heard a lot of rumors about credit cards and how they affect your score. Credit cards have the potential to both enhance and have a negative impact on your credit score. In many cases, both the positive and negative impacts will cancel each other out. Knowing a little more about these effects can help you make smart application choices, while taking advantage of credit card offers wisely.

Trying to achieve the highest credit score with new credit cards

When you apply for a new credit card and that application is successful, you improve your debt to credit ratio. This ratio accounts for around 30% of your overall score, which means you should see an improvement. However, this improvement will only hang around if you don’t max out your new credit limit. If you’re trying to improve your credit score, spend a small amount in proportion to that card’s credit limit and do what you can to pay off your balance each month.

Another factor impacting your credit score is the average length of time you’ve held your accounts. The longer you keep your accounts, the more your score will improve. Naturally, adding a new account to your report brings down the average age, which means you’re going to see a modest decrease in your score. The average age of your accounts makes up 15% of your credit score.

You may also see a decrease in your score because the credit card company made an inquiry into your credit report. When companies take a look at your credit report, they often view making a lot of applications at once as a credit risk. But one or two applications is fine. To them, making many applications in a short time can be an indicator of financial distress. Credit inquiries account for around 10% of your overall credit score, which means there’s a strong case for making wise decisions when applying for new credit.

So, while your credit score may decrease slightly immediately after applying for a new credit card because of the credit report inquiry and the decrease in average length of time you’ve held your accounts, this effect should eventually be offset by the increase in your total credit limit and decrease in debt-to-credit ratio. Overall, making a smart application, seeing it become successful, and managing your new debts well will see your score increase over time.

Knowing how to improve your credit score with a credit card

The good news is you can improve your credit score with a new card if you have the right strategy. Having a new credit card gives bureaus more data points to examine when they assess your creditworthiness. However, this is only a good thing if you manage your debts sensibly. Opening new accounts and subsequently being unable to repay your debts naturally leads to a score that’s worse than before.

One of the easiest ways to make sure your new credit card enhances your score is to make sure your debt-to-credit ratio is low. Specifically, be sure to make purchases with your new card because creditors want to see that you can handle credit wisely. But ensure you only use up to 20% of your new credit limit at any given time and do what you can to pay your bill in full each billing cycle.

For example, if you have $5,000 of credit available but only use $2,000, your debt-to-credit ratio is 2,000/5,000, or 40%. If you apply for a new card and are approved for a credit limit of another $5,000, you now immediately have $10,000 worth of credit available, which knocks that ratio down to 20%. This will increase your score.

Then, be sure to pay your credit card bill in full each month after you receive your billing statement since approximately 35% of your score comes from your repayment history. However, too much debt is also a hindrance, so never take on debt you can’t afford.

Therefore, the best approach to increasing your credit score or maintaining an excellent one is to approach new credit card applications sensibly and follow our simple advice.