Your credit score provides a quick snapshot of your creditworthiness as a borrower. Lenders use your credit score and report to assess how likely you are to repay future debts. From there, a lender will determine whether they will extend new credit to you, such as a credit card. Naturally, this means your credit score and report is an important thing to maintain in terms of finances.
In the short-term, applying for a new credit card does affect your credit score. A single credit card application will incur a hard inquiry causing a temporary, slight dip in your score. Eventually, your credit score will recover, in about six months to a year. Multiple credit card applications can have a more adverse effect on your credit score. In addition, lenders often perceive a high number of hard inquiries as a sign of financial struggle. Fortunately, you can be strategic with your credit card applications to minimize the negative impacts to your credit score. Learn more below.
How Your Credit Score is Impacted by Credit Card Applications
A hard inquiry occurs anytime a third party looks at your credit report. This could be a lender, landlord, or even an employer. Any time you apply for a credit card you must authorize the creditor to perform a hard inquiry. This means you have control over the hard inquiry amount.
Hard inquiries have a temporary, negative effect on your credit score which becomes less severe over time. According to Equifax, hard inquiries remain on your credit report for up to 3 years, but only impact your score for six months to a year. If you are applying for a mortgage, car loan or other significant form of financing in the foreseeable future, it is wise to avoid applying for new credit in the year leading up to the application. By not having any hard inquiries on your credit report in the last year, lenders will perceive you as a more responsible borrower.
Fortunately, there is a loophole. If you’re applying for financing and want to compare multiple offers, hard inquiries that occur within a small time frame, usually 14 to 45 days, are lumped together. This has a less severe impact to your score because the multiple inquiries are treated as one.
Applying for new credit cards can have a positive impact on your credit score too. First, by having more credit available to you with a new credit card, your credit utilization ratio will automatically increase. Credit utilization ratios measure the total amount of credit available to you versus how much you’re using. By having more available to you with no change to how much you’re using, your credit score will increase.
Second, if you manage the credit card properly by always paying on time and in full, your credit history will lengthen and improve your score. Credit history has the biggest impact on your credit score meaning it’s important to effectively manage your bills.
Finally, if you didn’t have a credit card before, your credit mix will expand which also improves your score. Credit mix refers to the kinds of credit you’re using. For example, credit cards, lines of credit and personal loans are all different forms of financing. By effectively managing multiple types of credit, your credit score improves. Note that the positive benefits will only be reaped if you can afford to hold various kinds of credit.
How to Prepare for a Credit Card Application
Since hard inquires hurt your credit score, you don’t want to waste time on credit card applications that have a high chance of being declined. Before sending an application, do your due diligence. This means checking for minimum credit score requirements, minimum income thresh holds, and other criteria. Obviously, if you don’t meet the minimum requirements, don’t waste your time on an application because you will be declined.
Leading up to your credit card application, you should pay your other financial obligations on time and in full. Also, pay off old debts that you can afford to pay. These things will enhance your financial position thereby bettering your odds of approval. If you’re applying for a new credit card and want to cancel your old one, you should wait until you’re approved at the very least. Cancelling old credit accounts will remove the payment history from your report. It’s better to keep old credit card accounts open unless there’s a really good reason to cancel it.
When you are ready to apply to one or more credit cards, the best strategy is to submit all credit card applications at once. Avoid staggering applications because that will have a more severe effect on your score.
At the end of the day, credit scores are there to help us achieve our financial goals, such as obtaining a new credit card. Even though a hard inquiry temporarily impacts your credit score, it’s a worthwhile endeavor to better your finances. Just be sure to incorporate strategy into your credit card applications and timing to avoid adverse impacts to your credit score. When you get your new credit card, be sure to pay on time and in full to quickly recover your credit score.