Learn How Opening a New Credit Card Can Affect Your Credit Score
Despite its power over our lives, many Americans don’t fully understand credit scores.
There’s a lot of misunderstanding of how credit scores work, and what they mean in terms of one’s ability to make life decisions.
One common misconception regarding credit scores has to do with credit cards. Some Americans open new credit cards frequently, with little regard to how this decision may affect other areas of their life.
But understanding how opening a new credit card can affect your credit score is very important.
Credit cards typically weigh on a credit score more than many other types of debt. So a new card in your name can make quite a large impact.
Read on, and we’ll walk you through everything you need to know about new credit cards your credit score.
Can A New Card Hurt Your Score?
The short answer is yes, it can.
That doesn’t mean opening a new card necessarily will hurt your credit score, but it’s important that you know that the possibility is there. There’s also a chance it could help your score.
If this is your first time opening a credit card account, for example, it will almost certainly boost your score. Starting to build and pay off debt helps to increase various lenders’ trust in you.
Sometimes it can even be difficult to open a credit card account with a low or non-existent credit score. That’s why there’s a number of cards out there for people with such credit score situations. Check this out to learn more about such cards.
If it’s not your first card, here’s how opening a new account might hurt your score.
It Lowers Your Credit Age
If you haven’t seen a credit score broken down before, you may not be familiar with what goes into a score. A small portion of your credit score (about fifteen percent) is based on the length of time you’ve been building credit.
This is important for lenders to understand. A lengthy credit history is considered more reliable than a brand new one.
This credit age is based partially off the age of your oldest credit account. But it’s also based on the average age of your various accounts. Opening a new account can cause this average to lower significantly.
This is especially true if it’s been a long while since you last opened a new credit account.
Inquiries Sometimes Lower Your Score
Inquiries to your credit score make up a small amount of your score. While the effect of inquiries is lowering in the modern age, they still have an impact.
An inquiry takes place any time a business checks your credit report. Constant checking can cause your credit score to tank, but even one check can cause it to fall a few points.
A credit card company will definitely need to check your score before issuing you a card. So this pre-account check might cause your score to drop slightly.
Poor Credit Utilization
Your credit utilization is the ratio of your credit card balance to your given limit. It plays into a much larger percentage of your credit score, at about one third.
When opening a new credit score, it’s likely that your given credit limit is lower. This is common in the early stages of a new card. If you put a large balance on a new credit card with a lower limit, your credit utilization will probably take a hit.
That means your credit score overall will likely take a hit as well. This is avoidable if you’re careful with a new credit card. But with low limits, it can be hard to not bring your credit score down a little.
Avoiding Credit Score Hits
It might seem unfair that getting a new credit card creates a risk of credit score loss. After all, you might even be opening a new card to help build your credit score in the long run. Such truth can be incredibly frustrating.
If you’re careful with your new card, you can avoid these credit score hits. If you keep your balance very low on your new card, it will actually cause your overall credit utilization to increase.
In this way, you could actually bring your credit score much higher. This will put you in a better position for almost any financial situation.
A new credit card also helps to raise the ‘types of credit’ part of your score. Diversification of credit lines is seen as a positive, so just the existence of a new card can have a small but notable increase on your score.
Even if opening a new card creates a small decrease in your credit score, there’s no reason this loss is anything but temporary. Responsible use of your new credit score over time will help build your credit score.
If you’re planning on applying for a loan, you should plan to do so a few months after receiving a new credit card. This way you can avoid your lowered score affecting the kind of loan you could receive.
As long as you’re acting responsibly with your credit cards, they should have a positive impact on your credit score in the long run.
Opening A New Credit Card
You never know when you’ll need a strong credit score.
Whether it’s to secure housing, land a loan, or display your responsibility, a strong credit score is essential. It’s important to understand how opening a new credit card can affect that score so that you can properly plan for your future.
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