You know it is important to monitor your credit score regularly. And have probably learned a few tips for how to improve it. But do you know how applying for a new credit card impacts your score? There can be pros and cons.
How a New Credit Card Can Hurt Your Credit Score
If you’re approved for a new credit card, it can hurt your credit score in a few ways (aside from the hard inquiry from the application):
1) More New Credit on Your Credit Reports
The “new credit” category makes up 10% of your FICO score, as research shows a connection between credit risk and opening up several accounts in a short period of time. However, the negative impact of new credit accounts is greater for consumers with a shorter credit history, so it may not have as much of an impact if you’ve been building your credit history for many years.
2) The Average Length of Your Credit History Will Decrease
The length of your credit history accounts for 15% of your FICO score, and includes the ages of your oldest and newest credit accounts, as well as the average age of all accounts. When you open a new credit card, it becomes your newest account and it brings down the average age of your accounts, which could cause your credit score to drop…
3) Increased Debt Can Cause Missed Payments
A final factor worth considering is how opening a new credit card will impact your spending habits. If you tend to use your credit cards a lot, maxing them out and/or carrying a balance from month to month, a new card could lead to increased debt as that balance grows…
How a New Credit Card Can Help Your Credit Score
A new credit card can have a net positive impact on your credit score if you use it responsibly.
Your Credit Utilization Could Decrease
If you open a new credit card and don’t increase your monthly credit card spending, the newly available credit will decrease your credit utilization ratio — the amount of credit card debt you have compared to your total available balances…Your credit utilization ratio accounts for 30% of your FICO credit score, making it the second largest factor, so a large reduction in this ratio could boost your score quite a bit.
On-Time Payment History Can Improve Your Score
Your payment history is the most important factor in your FICO score, making up 35%. Lenders want to see that you pay your bills on time. Late payments can drag down your score, while on-time payments will build it up over time. By making consistent on-time payments on your new credit card—and any other cards or loans—you should see your credit score go up, all other things being equal.
Your Credit Mix Will Improve
Opening a credit card could also improve your credit mix, especially if you don’t have any other credit cards on your credit reports. Showing you can manage diverse financial products, like credit cards, personal loans, and mortgages, can boost your score and signal responsible credit management to lenders…
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Like any aspect of your financial life, what is best depends on your personal circumstances, and can be complex. Understanding how each move you make can impact your financial strength and security is an essential life skill.