Additional Credit Cards And Your Credit Score
There are a seemingly infinite number of credit card offers on the market, with each offering a unique set of benefits and drawbacks. For some, it may be tempting to apply for every new card with the hopes of realizing discounts, sign up bonuses, or promotional interest rates. Others are skeptical of these opportunities, as they are duly concerned about the effect of new credit card applications on their credit score.
How A New Credit Card Application Impacts People’s Credit Scores
When someone applies for a credit card, the first thing that happens is that the bank makes an inquiry to one of the credit bureaus. This process retrieves the applicant’s credit history while adding a record of a new application for credit. By itself, a single additional inquiry is insignificant, yet multiple applications for new credit within a short period can have a negative impact on one’s credit score. New applications only impact the ten percent of the score that relates to recent inquiries. Therefore, the effect is minor and is only apparent in the short term, often as little as 90 days. Many people with credit card debt avoid taking advantage of 0% APR credit card offers due to credit score fears, but for people with high interest debt, the question should be how much are a few credit score points worth.
Beyond the slight negative impact that too many recent inquiries can have, receiving one or more new credit cards can actually have a beneficial effect on a cardholder’s credit history. This counterintuitive effect exists due to the nature of a cardholder’s credit utilization ratio. 30% of a cardholder’s FICO score is composed of the amount owed, which is judged relative to the amount of available credit that has been extended. The amount owed divided by the cardholder’s available credit determines the individual’s credit utilization ratio. Thus, for a given level of debt, having more available credit reduces one’s utilization ratio and actually improves a cardholder’s credit score. Since this part of a credit score is weighed more than the component concerning new credit, it is often the case that cardholders see their credit score rise when they receive one or more new credit cards.
Good credit is one of the most important assets that people can have as it can affect their ability to buy a home, get a job, and even receive a good rate on their car insurance. Applications for new credit should not be taken lightly, but cardholders should also realize that these actions, by themselves, will rarely have a negative effect on their credit score. As long as credit card users do not use new cards to get deeper into debt, there is no harm in taking advantage of the best offers as they come along.
