Applying for a credit card can, at the surface, be a very simple process. You can fill in an application while you’re waiting for a flight at the airport or after finishing your shopping at the grocery store. The credit card companies are happy to welcome you as smoothly and as quickly as possible into their crowd of cardholders.
However, once the application is complete, the next step seems almost shrouded in mystery. The credit card company confers with the Great Credit Scoring Company who holds an ever-changing, mathematical and unique piece of information about you – your credit score. This discussion results in a yes or a no to your credit card application. But is there an additional result of this discussion? Does this one application have an affect on your credit score?
What Makes Up Your Credit Score?
To understand how applying for a credit card affects your credit score, we need to first understand a bit about the credit score and its foundation, the credit report.
Your credit report is a record of all your credit history, including everything from your student loan applications to your car loan payment history. These credit reports are maintained by national credit bureaus and any information related to your credit dealings with credit card companies, the bank, the government or elsewhere end up on your credit report.
Your credit score is a three-digit number that reflects your personal creditworthiness. A credit scoring company uses a complex and secretive algorithm to scan through the data from your credit report and calculate the numerical score. When the credit card company sends an inquiry about your credit, they are asking for your credit score and that little number will tell them whether or not you, as a potential credit cardholder, are a safe bet.
What’s In A Number?
As the credit score is an indicator of how likely you are to be a reliable debtor, the score reflects how well you’ve done in the past and what level of risk of defaulting on your loans you hold based on your current credit status. For example, two of the big influencers across credit scoring companies are payment history and the percent of your total credit currently used.
Applying for a credit card falls under the category of new credit inquiries. Though each company has its own algorithm, new credit inquiries are a minor influencer affecting roughly 10% of your credit score. Though inquiries are a minor influencer, applying for a new credit card can still negatively affect your credit score.
The One Versus The Many
The good news is that applying for one new credit card may briefly lower your credit score, but the negative effect of that inquiry will not last long. Applying for credit cards is common and with an otherwise positive and unchanged credit history, the effect will be minimal and in about three months, your score will recover.
The real negative impact happens when you apply for multiple credit cards in a short period of time. This series of new credit inquiries essentially sets off alarm bells to the credit scoring company. Their research indicates that someone who is applying for lots of new credit all at once often is in financial trouble and is at risk of missing payments or defaulting on their existing loans. This signal causes your score to fall, as your credit no longer seems trustworthy.
This signal is even stronger if you don’t have a long credit history. Your credit history, or how the number of years that you have held any type of credit, is another score influencer. A long credit history can have a positive effect on your credit score. For a young person, a credit history of just a couple years combined with a series of credit inquiries can cause a serious reduction in credit scoring.
To Apply or Not to Apply?
The best time to apply for a credit card can be influenced by a number of factors. Here are a series of application scenarios and how to best balance that flashy new credit card and a shiny credit score.
You want to apply for one new credit card and you have no credit concerns:
- Apply away! One credit inquiry will have a minor negative effect, but it won’t last long.
You want to apply for one new credit card but will also be applying for a major loan in the near future:
- Consider delaying your credit card application. Though the negative effect on your credit score is minimal, that score will be reviewed when you apply for your loan, whether for a vehicle, for education, or for a home. You should enter the major loan application with the best credit score possible and even a minor drop in your score could impact the conditions of your larger loan.
You want to apply for a few different credit cards to benefit from a range of rewards:
- Compare all the credit cards that interest you and their benefits. Rate the cards based on which ones have the most valuable benefits and the most favorable lending terms. Apply for the one credit card that comes out on top of your list. Wait three to six months or more and apply for the next credit card on your list. By applying for them all at the same time, the rewards might be fun, but you could pay a higher interest rate on your credit card because of your decreased credit score.
You want to apply for a few different credit cards because you need more money:
- Do not apply for the credit cards. Credit cards are some of the highest interest loans you can receive. There are a range of other loan types and, perhaps more importantly, money management strategies that will allow you to meet your monetary needs. The series of credit inquiries will lower your credit score, and using credit cards to access money will likely cause other credit issues that will further lower your score.
In the end, every person’s credit history and credit score are unique. The same credit card application inquiry will affect each person’s score differently. However, limiting the number of credit card inquiries over a short period of time to one is a good rule of thumb.