Wondering what impact a new credit card will have on your credit score? Here is what you need to know.
There may come a time when you decide to open a new credit card. Perhaps there is a card with a generous sign-up bonus. Or maybe you want a credit card that offers travel rewards.
If you are considering opening a new credit card, you should be aware that it might cause your credit score to drop slightly. But in the long run, a new credit card might actually improve your score.
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A small drop in credit score at the start
Every time you apply for a loan or credit card, it counts as a serious investigation of your credit report. One serious investigation won’t do much damage to your credit. If anything, you should expect a 5-10 point drop.
Now, if your credit score is not very strong and you are preparing to apply for a large loan, like a mortgage, you may want to wait after that loan is in place to apply for a new credit card. credit. You need a minimum credit score of 620 to get a conventional mortgage, so if your score is 624, just one serious investigation could drop it below that threshold. But if your score is 720, a 5-10 point hit shouldn’t matter.
A new credit card could also hurt your credit score a bit by lowering the average age of your open accounts. If you have seven credit cards, which you’ve kept for 10 years or more, opening a new card probably won’t hurt your score as much. But if you’ve only had two cards open for a while, your score may be hit in the short term when you open a new card.
A long-term advantage
If you don’t accumulate a huge balance on your new credit card, opening it might actually help your credit score improve over time. An important factor that goes into calculating your score is your credit utilization rate. This ratio measures how much of your total available credit you are using at one time, and it carries more weight in calculating your score than the length of your credit history.
Let’s say you currently have a total spending limit of $ 10,000 on all of your cards and have a balance of $ 3,500. That puts you at 35% usage, which is pretty high and may damage your score (a ratio of 30% or less, on the other hand, is good for your score). If you were to open a new credit card with a limit of $ 3,000, your credit utilization rate would suddenly drop to 27%.
Do I have to apply for a new credit card?
There are plenty of reasons you might want a new credit card, from a better rewards program to more flexibility for urgent spending. While opening a new credit card may initially hurt your credit score, it should be minor. And you can more than make up for that by increasing your total credit limit.