Wondering how a new credit card will impact your credit score? Here’s what you need to know.
There may come a point when you decide to open a new credit card. Maybe there’s a card out there with a generous sign-up bonus. Or maybe you want a credit card that offers travel rewards.
If you’re going to open a new credit card, you should be aware that doing so might cause your credit score to drop modestly. But in the long run, a new credit card could actually help your score improve.
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A small credit score drop initially
Any time you apply for a loan or credit card, it counts as a hard inquiry on your credit report. A single hard inquiry won’t do a lot of damage to your credit. If anything, you should expect a 5- to 10-point drop.
Now, if your credit score isn’t super strong and you’re gearing up to apply for a large loan, like a mortgage, then you may want to hold off on applying for a new credit card until after that loan is in place. You need a minimum credit score of 620 to get a conventional mortgage, so if your score is at 624, a single hard inquiry could cause it to fall below that threshold. But if your score is at 720, a 5- to 10-point hit shouldn’t matter.
A new credit card might also hurt your credit score a bit by lowering the average age of your open accounts. If you have seven credit cards, you’ve maintained for 10 or more years, opening one new card probably won’t hurt your score all that much. But if you only have two cards you’ve had open a while, your score might take a near-term hit when you open a new card.
A benefit in the long run
If you don’t rack up a huge balance on your new credit card, then opening it could actually help your credit score improve over time. One big factor that goes into calculating your score is your credit utilization ratio. That ratio measures how much of your total available credit you’re using at once, and it carries more weight in calculating your score than the length of your credit history.
Let’s say that you currently have a total spending limit of $10,000 across all of your cards, and you’re carrying a $3,500 balance. That puts you at 35% utilization, which is kind of high and is likely to cause some damage to your score (a ratio of 30% or less, by contrast, is good for your score). If you were to open a new credit card with a $3,000 limit, suddenly, your credit utilization ratio would drop to 27%.
Should you apply for a new credit card?
There are plenty of reasons you might want a new credit card, whether it’s a better rewards program or more flexibility in case emergency expenses pop up. While opening a new credit card could hurt your credit score initially, that hit should be minor. And you can more than make up for it by virtue of increasing your total credit limit.
