Several things happen when you open a new credit card, which could potentially increase or decrease your credit score.
You’ll be generating hard inquiries on your credit reports and also decreasing the average age of your accounts, which will both lower your score, but you’ll also be increasing your total amount of available credit, which could improve your score.
You can’t say that opening a new credit card will always have a positive or negative effect for everybody, but if you understand how a new card affects your credit report you’ll be able to predict what might happen to you.
Learn all about the consequences of opening new credit cards in our video with credit expert John Ulzheimer.
Hi. My name is John Ulzheimer, and I’m a credit expert who contributes to CreditCardInsider.com.
If you have any questions for us please submit them in the comments section below. Today’s question is this is…
Does opening a new credit card hurt my credit score? It’s an interesting question.
There’s a lot of meat on the bone. So let’s address all of the ways that opening a new credit card can have some form of an impact on your credit report, because that’s more important than the score, because the basis for the score is actually the information on the reports.
So what’s really more important isn’t necessarily the direct impact to your score, but how does it change the credit report, which can then lead to some sort of change in the score.
First and foremost, opening a new credit card will not always lower score. In fact, opening a new credit card could actually increase your credit score. So your scenario is going to be different than, for example, someone else’s scenario.
So there is no blanket answer to the question that is going to cover every single scenario where someone opens a new credit card. So let’s talk about what happens when you apply for and open a new card.
First off, you’re making an application for credit, so the credit card issuer is going to pull one of your credit reports, which is gonna leave a credit card inquiry on 1 of those reports. Inquiries do have the ability to lower your scores, but very slightly, and there’s a good chance that it’s not going to have any material impact on your score whatsoever.
And if it does affect your score, it’s only going to affect 1 of your 3 scores, because the inquiry is only going to show up on 1 of your free credit reports.
Number 2… when you do open a new account the credit card issuers going to report it to the 3 credit reporting agencies. That is going to add a new credit card to the report. And because it has a new date opened, it can change the average age of your account, because you just added a new account to the report.
That’s actually more problematic than the inquiry for a couple reasons: It could be across all 3 of your credit reports because the account is generally going to be reported to all 3 of your reports. And second is the category within the credit score that measures the average age of your account is actually much more influential than the inquiry category.
If by adding a new credit card to your credit report, you lower or reduce the average age of your accounts, considerably that can cause your credit score to go down. But it doesn’t necessarily have to go down. People who are younger, who have not had credit as long, or someone, who like me, who’s much older, who has had credit for a very long time, it’s not really going to be materially impactful to the score.
So these are all things that could reduce your score. Let’s talk about some way that opening a new credit card can actually improve your score. There is a measurement within credit scoring systems referred to as the debt to limit ratio. Some people call it revolving utilization. It all means the same thing.
It’s essentially the relationship between the balances on your credit cards, and the credit limits on your credit cards. And the way you calculate it is you divide your aggregate balances by your aggregate limits, and that yields a percentage. The lower that percentage, the more points you’re going to earn in your score. And that’s a very important category, meaning that it’s worth a lot of points.
By opening a new credit card you’re going to add an used credit limit to your credit reports, $10,000, $15,000 maybe even $25,000 of unused credit limit. By doing so, you are going to reduce, and you may reduce considerably that debt to credit limit ratio.
So by doing nothing other than just sticking a brand new credit card on your credit report, you can actually see your score go up, and go up considerably depending on how much other credit card debt you’re carrying.
Obviously most people open credit cards because they want to use the credit card. And when you start adding balances, then that’s actually gonna level the playing field a bit, because you’re not gonna get the full benefit of the unused credit limit because you’re leveraging it to some extent.
You can actually perform a little bit of an investigation yourself and see how it’s going to affect your score. Pull your credit reports list all the credit cards, and the balances, and then lists all the limits. And then add up all of your balances, add up the limits, and then divide the balance by the limit, and play around with that division problem by adding some amount of credit limit to the credit report.
And you’ll actually see, “Hey! My ratio down from 40% to 20% from 20% to 5%. And you can feel fairly confident that as that percentage is going down, then your store is going to go up because again, it’s a very important factor and you’re going to start earning some points.
The optimal or the target percentage for that metric is less than 10%. So if you can possibly keep your credit card usage as modest as possible, and hit that below 10% target every single month, you’re actually going to do very well on your credit score.
If you have any other questions pertaining to credit or financial topics then please submit them to CreditCardInsider.com or in the comments section below. Thanks for watching! Have a nice day!