How does getting a new credit card affect credit score?
November 14, 2019
Usually, the first question anyone asks me when discussing new credit cards is “Won’t this affect my credit score?”
The short answer is “YES”…but not by much
For anyone living in the United States, you’ve probably seen or heard advertisements about your credit score from credit monitoring, fraud prevention, loan agencies, etc. These days, if you have a credit card, the issuer has some sort of monitoring service that tells you what your score is and any changes to your score. Even if you don’t have a credit card, services like Mint.com can provide your score for free. But what is it really, and how does it affect you?
What is your credit score?
A credit score is based on a credit report pulled from one of the three major credit bureaus: Experian, TransUnion, and Equifax. You’ve probably heard of these. Income and employment history (and other personal information) are not considered when calculating credit scores. The number (ranging from 300 to 850) implies how “credit-worthy” you are relative to others. Basically, how likely you are to pay your bills. The number can also vary based on the exact calculation and which credit bureau report is pulled. Banks and lenders (and credit card companies) use this score to determine whether to approve you for a loan or card and set credit limits and interest rates. Insurance companies, landlords, and employers might also use credit scores for various situations.
Credit Score Breakdown
So what’s the exact calculation? Think of it like a GPA (sorry to bring back any bad memories from school). There are different weights for each category.
- Payment History looks at if you have paid your bill in full when due.
- Amount Owed (Utilization Ratio) looks at how much of your total credit limit you are using at a certain time. It’s a simple ratio of Outstanding Balance / Total Credit Limit. You want this number to be as low as possible.
- Length of History is the average age of your accounts and if you still use them; the older the better.
- New Credit is simply new accounts that have been opened recently. This also includes pulls of your credit report (so every time you apply for a card or loan).
- Credit Mix includes diversification of your credit (student, car, mortgage).
As you can see, the biggest factors are Payment History and Amount Owed. You should ALWAYS pay off your balances in full every month.
This can seem complicated. But essentially, you want the bottom number to be as big as possible. The easiest way to do that is to get new credit cards. The top number, your spending, shouldn’t fluctuation that much on a monthly basis.
Length of History
The basic strategy is to keep older accounts active even if you aren’t using them. You should use them once in a while to show that they are active. I recently had two cards I signed up for from college, my oldest accounts (clearly showing my age), canceled on me for inactivity…amateur move!
This is the reason you’ve read this far. Every time I apply for a new card (credit card company pulls my credit report), about 3-5 points get dinged from my credit score. But after getting approved, my Utilization Ratio improves (my credit limit increases) and my credit score goes back up.
This is basically a non-factor and hard to control. Either you have them or you don’t. Please don’t go out and buy a new car or house just to improve your credit score a few points (unless you have stacks of cash just sitting around).
This clears the myth that new cards greatly impact your credit score. Most of the time, it actually improves your score. Case in point; see my score below after applying for my newest card and after being approved and receiving my card!