How does applying for a new credit card affect my credit score?
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The idea of earning free flights and hotel stays just by signing up for the right credit cards seems too good to be true, and there are plenty of myths about how it all works. When you’re trying to introduce someone to the world of reward travel, you might have to dispel some of those misconceptions.
One of the most common things people believe when they start applying for new credit cards is that those actions will negatively and permanently impact their credit scores. While it is true that recklessly opening new lines of credit and abusing them (i.e. racking up large balances, carrying interest and missing payments) can hurt your credit score, there is no long-term impact on your score from simply opening new accounts.
Since credit card sign-up bonuses are the foundation of travel rewards, today we’ll take a look at how your credit score is affected when you open a new credit card.
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Factors that affect your credit score
Even if you’ve done your research and decided which card you want to start with, you should not apply for it until you understand how your credit score is calculated.
Here’s a breakdown of the factors involved:
- 35% payment history: It’s no surprise that the category that carries the most weight is your on-time payment history.
- 30% amounts owed: Also referred to as utilization rate, this is the total balance on all your credit cards divided by your total credit limit.
- 15% length of credit history: Also known as the average age of accounts. The longer your credit history, the higher your score will be.
- 10% credit mix: This refers to the various lines of credit you may have, including credit cards, student loans, a car loan, a mortgage, etc.
- 10% new credit: New inquiries on your credit report account for 10% of your score.
Related: How credit scores work
Hard inquiries vs. soft inquiries
Your credit is likely to be checked dozens of times over the course of your life, whether you’re applying for a credit card or starting a new job. There are two different types of inquiries, and it’s important to understand the difference.
Hard inquiries are times when your credit is checked in connection with an application for a new line of credit, such as a credit card or loan. These inquiries get reported to the credit bureaus and are the ones that appear on your credit report and affect your score.
A soft inquiry would be if you checked your own credit report (to figure out if you were under 5/24 with Chase for example) or you let your employer check your credit as part of the hiring process. Soft inquiries do not get reported to the credit bureaus, and won’t impact your score in any way.
How do hard inquiries affect your credit score?
Almost every time you apply for a credit card, you will receive a hard inquiry on your credit report. There are some exceptions, such as the fact that American Express won’t often inquire about existing customers until the new application is approved. While the exact impact might vary from case to case, generally speaking, you can expect your score to drop by about five points each time you apply for a new credit card.
This might seem scary if you’ve been working to improve your credit score for a long time, but it’s important to remember that the exact number is rarely what banks look at when evaluating your application. They’ll put you into a range, say 700-750 — so if your score drops from a 740 to 735 it is unlikely to have any real effect on future approval odds.
Having too many recent hard inquiries can drag down your score. Credit Karma says that your score starts to be impacted with three to four recent inquiries, but especially once you get above five. The inquiry will stay on your credit report for up to two years (which makes it easy to keep track of your 5/24 status), but the impact fades over time. If you see a jump in your credit score one month that’s not linked to any obvious event (such as paying off a balance), it might be the effect of your inquiries fading.
How many is too many?
A good credit score is something you can leverage to your advantage. If you put your score behind a glass display case and never tap your available credit, you’re leaving valuable rewards on the table. I currently have nine inquiries on my TransUnion and Equifax reports, yet my scores are both excellent because I keep my utilization ratio low, pay every bill on time and have never missed a payment. Even though my hard inquiries category is in the red zone according to Credit Karma, my overall credit health is great.
One area where you’ll start to run into trouble is with card issuers that are “inquiry-sensitive.” This is not an official policy, but certain banks, including Citi and Capital One, will often reject applicants with excellent credit scores because they have too many recent inquiries on their credit reports. I applied for the CitiBusiness® / AAdvantage® Platinum Select® Mastercard® to take advantage of a past sign-up bonus, and I was rejected partly because of the large number of recent inquiries on my credit report.
The information for the CitiBusiness AAdvantage Platinum card has been collected independently by The Points Guy. The card details on this page have not been reviewed or provided by the card issuer.
Unfortunately, there’s not much you can do about this other than be aware of the policies. If you’re one of those people who likes to apply for credit cards in batches of two to three at a time, you should try and do your Citi and Capital One applications first to minimize the number of recent inquiries on your report.
A crucial step in becoming comfortable applying for credit cards is learning the factors that affect your credit score, and knowing that the impact on your score from an application is minimal. A five-point drop is a small price to pay if it helps you unlock a sign-up bonus worth $1,000 or more in free travel.
Remember that the drop is only temporary. Not only will the effect of the inquiry fade over the course of two years, but in the long term you can also boost your score by continuing your history of on-time payments and increasing the average age of your credit accounts.
Additional reporting by Madison Blancaflor.
Featured image by Isabel Raphael/The Points Guy.
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