There are various types of credit cards, and they come with several perks and rewards like cash back, welcome, travel bonuses, and other rewards.
With a wide range of credit card options to choose from, consumers may wonder if they can apply for a new credit card and if the move will affect their credit score.
Does Applying for a New Credit Card Hurt Your Credit Score?
A common concern among consumers is whether applying for a credit card has a negative impact on their credit score. The simple answer is yes, but there are ways in which you can reduce the effect on your credit score.
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First, you need to understand some reasons why your new credit card application can negatively affect your credit.
Why A New Credit Card Will Have A Negative Impact On Your Credit
A New Credit Inquiry
After applying for a new credit card, the card issuer will ask for your consent for a hard credit check. Hard credit inquiries usually occur when your financial institution or creditor reviews all your credit reports to know if you are a responsible borrower and if you keep up with your payments.
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It’s like running a background check on you, and every time this occurs, your credit score will decrease.
Further Analysis
In most cases, hard credit checks only drop your score by a few points. They are also temporary; they only stay on your credit report for two years.
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New Account After Approval
If approved, a new credit account will be on your credit report. Several new credit accounts on your report, especially after a short period, may give creditors doubts and concerns.
The Impact of Several Credit Accounts
Your lender or creditor may feel like you’re going overboard, and you might struggle with future payments if you have several credit accounts.
A new credit account will reduce the average age of all your accounts, affecting your credit score.
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If you have a long credit history, a new account will have minimal impact on your credit compared to when you open a new account after a credit report of less than five years.
Increased Debt
A new credit card will come with many perks and bonuses you might want to take advantage of; this, however, will only rack up more debt. The more your credit utilization increases, the more your credit score will drop.
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We have mentioned reasons why your credit score will be negatively affected when you apply for a new credit card; however, a new credit card can also be a good thing.
How a New Credit Card Can Help Your Credit Score
In the long run, a new credit card can be advantageous to your credit score for the following reasons:
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A Better Credit Mix
A credit mix means different types of credit accounts. Creditors like to see that consumers can handle multiple forms of debt, like mortgages and installment loans, responsibly. A new credit card can improve your credit mix and help increase your credit score.
Enhanced Credit Utilization
When you get a new credit card, your credit or spending limit may increase. With a new credit limit, your credit utilization, that is, the credit that is available to you, may improve.
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A new credit card might motivate or encourage you to keep a good payment history, and making timely payments can help increase your credit score.
How to Reduce the Impact of a New Credit Card on Your Credit Score
Use Prequalification Tools
You can use your credit card company’s prequalification tools to know if you’re qualified for a card. This process will have no impact on your credit score.
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You may also try other alternative approval processes that require no credit check to apply. These can help you make proper decisions.
Apply For Credit Only When It’s Necessary
You should only apply for a credit card when you really need it. Consider your budget and expenditure, both present and future, before applying for a new card.
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You should also consider your timing. You might want to buy a house in the near future and to do that, you might want to increase your credit score; getting a new credit card before then is not advisable.