A credit card can be a useful tool if you’re trying to build or rebuild your credit rating. But you shouldn’t assume that opening a new credit card is a golden ticket to good credit.
In fact, the act of applying for a new credit card account can sometimes have a small negative impact on your credit score—at least in the short term.
The fact that applying for a credit card might hurt your credit score temporarily may be disappointing. But that potential credit score setback isn’t the end of the story.
The overall credit score impact of a new credit card account is often positive. When you manage your new credit account well, it's easy to bounce back from any initial setback that a new account application might cause.
Questions about credit scores are notoriously tricky. The reason this is true is because credit-related questions seldom have a simple yes or no answer.
More often than not, a question about how a certain action will impact your credit score will elicit the following answer: “It depends.”
So, if you’re wondering whether applying for a credit card will hurt your credit scores, it depends. Applying for any type of new credit—credit cards included—has the potential to impact your credit score in a negative way. But credit score damage isn’t a given.
A new credit card application causes something known as a hard credit inquiry (or hard pull) to appear on your credit report. A credit inquiry is a record showing that someone accessed your credit information.
When a credit scoring model like FICO® or VantageScore sees an inquiry on your credit report, it might assign you a lower credit score as a result. Too many inquiries in a short period of time can indicate that you’re a higher credit risk.
Yet it's important to keep the level of this potential score impact in perspective. Credit inquiries are among the least meaningful factors that affect credit scores. In a FICO credit scoring model, hard inquiries are only one of several factors that affect 10% of your credit score. And after 12 months, hard inquiries no longer have any credit score impact.
Furthermore, every credit report and score is different. Sometimes a new credit application won’t affect your credit score at all. And if a single new hard inquiry does have a score impact, it will generally lower your FICO Score by less than five points.
If you’re working to rebuild or build credit, you’re probably doing so for a reason. You most likely want to put your good credit (once you achieve it) to work for you.
Perhaps you want to qualify for a mortgage loan. Maybe you want to secure an auto loan with a competitive interest rate. Or you might want to qualify for an attractive credit card offer.
It’s fine to leverage good credit to your advantage. That’s the point of working hard to improve your credit in the first place. But it’s still a good idea to ask yourself “why” before you apply for a new account—credit card or otherwise.
For example, if your goal is just to get a new credit card and you aren’t working on improving your credit score for a future mortgage or car loan, then maybe the temporary ding to your credit score isn’t something to worry about.
If you’re applying for a credit card as a tool to improve your credit, then it’s best to take a long view.
As noted earlier, the hard credit inquiry is only a small factor and only for a relatively short amount of time. More importantly, from a credit-building perspective, the credit card account gives you a chance to build payment history, increase your available credit and manage your credit utilization - all important credit score factors.
If your real goal is mortgage approval or a car loan, then timing may be a more important consideration. If you're one to two years away from applying for a mortgage, then you have a good amount of time to recover from the temporary negative impact of the hard inquiry from a credit card application.
If, however, you’re planning to apply for a mortgage in a month or two, you might want to talk to a couple lenders to see how they’d view the credit card inquiry in the context of your current credit history.
Any of the above may be valid reasons for applying for a new credit card (provided you feel confident you can manage a credit card account wisely).
However, if you’re considering a new credit card to score a discount on a purchase or you’ve applied for a lot of new credit recently, you might want to pause before you fill out a credit card application.
The best way to minimize the impact that a new credit card application may have on your credit score is to research your options up front.
It’s unwise to apply for too many new accounts in a short period of time. In the case of credit card applications, multiple hard inquiries can damage your credit scores more than a single inquiry.
Before you apply for a new credit card, consider taking the following steps.
Complete the steps above and you’ll be better prepared to apply for a credit card that’s likely a good fit for you.
Having a credit card issuer deny your application can be discouraging. However, a credit card denial is no more damaging to your credit score than a standard credit card application.
The hard inquiry itself is the action that has the potential to temporarily hurt your credit score.
Your credit reports don’t record the outcome of your applications (A.K.A. approval or denial). Since a credit card denial won’t show up on your credit reports, being denied for a credit card will not hurt your credit scores.
Your credit history and credit score matter a great deal when you apply for a new credit card.
But creditworthiness isn’t the only factor a financial institution will evaluate when you fill out a credit card application. Your capacity to pay plays an important role in your credit card application as well.
Credit card companies determine your capacity to pay for charges based on the relationship between your income and the debts you owe, or your debt-to-income (DTI) ratio. Your monthly housing payment, which isn’t always featured on your credit report in the case of a rental, may also play a role.
Higher income and lower debts leads to a lower DTI ratio. When your DTI falls between 35% and 50%, you’ll usually be eligible for some approvals, but a lower DTI ratio is favorable whenever you apply for new financing.
With credit card applications, you can include more than the money you earn or receive personally. You can also list income belonging to other members of your household. However, in order to include household income on your credit card application, you need to have a reasonable expectation that you’ll have access to those funds.
Your income can impact not only your ability to qualify for a credit card, but also the credit limit you receive if a card issuer approves your application. It can affect your terms of credit (A.K.A. interest rates, fees, etc.) as well.
Say your income does increase and you become interested in upping your available credit, you may wonder, “does requesting a credit increase hurt your score?” It depends on several factors and each individual’s situation. However, if not only your income increases, but you also have a pristine credit history, requesting a limit increase could be beneficial since the card issuer is recognizing you are a responsible user.
Timing is important when you’re gearing up to apply for a mortgage in the future.
You typically won't want to apply for a new credit card or any other financing at certain points during the mortgage approval process.
For example, you may want to avoid applying for new credit:
However, if you’re working to improve your credit score for a mortgage application that won’t take place for a while, a new credit card might be beneficial.
When you open a credit card, maintain a good payment history on the account, and keep your credit utilization rate low, the account may help to improve your credit rating. A well-managed credit card could potentially put you in a better position when you later apply for a home loan.
Small business owners can open another type of credit card account — a business credit card.
Business credit card accounts can help you keep your personal and business finances separate. These cards can also help with cash flow, and they may help you earn valuable rewards or cash back on business-related purchases.
When you open a business credit card, the card issuer is almost certain to require a personal guarantee on the account. A personal guarantee gives lenders added leverage in the event that your business fails or it falls behind on credit card payments for any reason.
In addition to checking your business credit information, credit card companies often perform a personal credit check when you apply for a business credit card. If a business credit card issuer does review your personal credit, a hard inquiry will show up on your consumer credit report. In this case, does checking your credit score lower it if performed by an issuer?
That hard inquiry has the potential to impact your credit score—just like it would in the case of a consumer credit card application.
Michelle L. Black is a leading credit expert with over 17 years of experience in the credit industry. She’s an expert on credit reporting, credit scoring, identity theft, budgeting and debt eradication. See her on Linkedin and Twitter.