Does Applying for a Credit Card Hurt Your Credit Score?
Demystify the impact of new credit card applications on your credit score. Get clear insights into how your score is affected and how to apply responsibly.
A credit score serves as a numerical representation of your credit risk, indicating the likelihood of you repaying debts on time. These three-digit numbers are widely used by lenders and creditors to assess creditworthiness when you apply for new accounts. Your credit score can influence whether you qualify for credit cards, loans, or mortgages, and it often determines the interest rates and terms you receive. A higher score generally signals less financial risk, potentially leading to more favorable lending conditions.
Understanding Credit Inquiries
Applying for a credit card involves a process that can impact your credit score, primarily through what is known as a “hard inquiry.” A hard inquiry occurs when a lender checks your credit report as part of a decision to extend new credit, such as for a credit card, mortgage, or auto loan. These checks are recorded on your credit report. This type of inquiry can temporarily lower your credit score by a few points, as it may signal potential new debt and increased risk to lenders.
The impact of a hard inquiry is usually minor and short-lived, with scores typically rebounding within a few months. While hard inquiries remain on your credit report for up to two years, their effect on your credit score generally lasts for only about 12 months. Multiple hard inquiries for credit cards within a short timeframe are usually treated individually, unlike those for installment loans such as mortgages or auto loans, where multiple inquiries within a 14 to 45-day window might be counted as a single inquiry.
In contrast, a “soft inquiry” does not affect your credit score. Soft inquiries happen when you check your own credit report, or when a potential employer or a company checks your credit for pre-approval offers without a specific application. These checks do not influence your score because they are not tied to a new credit application.
How Credit Scores Are Determined
Credit scores are calculated using information from your credit reports, with various factors weighted differently. The most significant factor is payment history, accounting for approximately 35% of a FICO Score, reflecting consistent on-time bill payments. Amounts owed, or credit utilization, is another substantial component, typically making up about 30% of your score, measuring how much of your available credit you are using.
The length of your credit history, which includes the age of your oldest and newest accounts, contributes around 15% to your FICO Score. Your credit mix, representing the variety of credit types you manage, accounts for about 10% of the score.
New credit, including recent applications and newly opened accounts, makes up the remaining 10% of a FICO Score. While this factor is less impactful than payment history or credit utilization, opening several new accounts in a short period can signal increased risk to lenders.
Managing Credit Card Applications
Before applying for a new credit card, check your current credit score. This allows you to identify cards for which you are more likely to qualify. You can access your credit score for free from various sources without impacting it.
To minimize negative impacts, avoid submitting multiple credit card applications within a short timeframe. A cluster of hard inquiries can appear as higher risk to lenders, potentially leading to a larger score reduction. Spacing out applications, such as waiting several months between them, can help mitigate this effect.
Consider utilizing pre-qualification or pre-approval tools offered by card issuers. These processes involve a soft inquiry that does not affect your credit score and can indicate your likelihood of approval. While not a guarantee of approval, receiving a pre-qualified or pre-approved offer can help you apply with greater confidence and avoid unnecessary hard inquiries.