New Credit Card Impact on Credit Score: New credit card opening is a widespread financial action to get rewards, control costs, or even create credit. Despite the purpose, the same question always troubles everyone: will a new credit card negatively affect the credit score? The answer is a bit short, yes, it may affect the credit score temporarily, yet the whole picture is much more complicated.
The first thing to do is to talk about basics in terms of how credit scores are determined. You can see the real impact of the new credit card if you knew how credit scores worked.
New Credit Card Impact on Credit Score
Banks and credit card companies depend on the FICO Scores and VantageScore which are both derived from your credit report data. Even though the precise calculations are secret the main factors have been widely known:
- Payment history (approx. 35%)
- Credit utilization or total debt (approx. 30%)
- Length of credit history (approx. 15%)
- Credit mix (approx. 10%)
- New credit and queries (approx. 10%)
A new credit card is more likely to disturb mainly the last three factors: new credit, length of credit history, and credit utilization.
Why Your Score Drop at First?
The first thing that happens when you apply for a new credit card is that the issuer requests a hard inquiry on your credit report. This is an indication that you are looking for new credit and may lead to a small drop in your credit score for a short duration typically about 5 to 10 points for most people. Usually, this impact is insignificant and goes away after a few months provided there are no other hard inquiries that follow.
Also, the new account can reduce the average age of your credit accounts, mainly if your credit history is quite short, it can be particularly bad for you if you are a new borrower or have a small credit limit. Lenders like to see long, stable credit histories so this change may have somewhat negative impact on your score in the very short term.
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Where a New Card Can Actually Help?
At this point, it is time to reveal the fun part: gaining a new credit card boosts the total amount of credit that you can use. However, if you do not change your spending habits much, your credit utilization ratio will decrease, and simultaneously the percentage of your credit being used by you will drop. Since utilization is one of the major scoring factors, this can, in turn, positively affect your credit score after a while.
Let’s take for example a scenario where you possess ₹2,00,000 in total credit limits and ₹60,000 in balances which translates to a 30% usage of credit. When you add a new card with a limit of ₹1,00,000 and keep the same level of spending, then your usage will fall to 20% which is generally regarded as a more creditworthy position when evaluated by the scoring models.
In What Conditions Would A New Card Be Beneficial To Your Credit Profile?
The initial outcome might be a little bit of a downside, but responsible credit card usage usually lifts the credit score over the long haul. And here is the way:
- The new card’s timely payments bolster your payment history.
- The lower utilization makes one of the most powerful scoring factors work in your favor.
- The diverse credit types are one more point of attraction for lenders signaling you that you can take different types of credit responsibly.
The account will take time to age but eventually, it will be a contributor to your credit history and not a detractor.
When Opening a New Credit Card Could be a Double-Edged Sword?
Even though getting just one new card is generally not a problem, there are circumstances that can worsen the situation:
1. Submitting many applications for cards in a short timeframe leading to numerous hard inquiries.
2. Making large purchases right after the card is issued, which results in higher utilization.
3. Cancelling older cards right after getting a new one, which shortens your credit history and decreases your available credit.
4. Not making payments on time, which is the most destructive element among all.
If you are willing to take a major loan such as that for a house or car, it is usually advisable to refrain from applying for new credit cards during the months preceding the loan application.
How Long Does It Take for Your Credit Score to Recover?
The opening of a new credit card has a temporary effect on the scores of most people. Hard inquiries are known to affect the credit scores for a period of 3 to 12 months although they remain part of the credit report for a maximum of two years. If the card is used wisely, many consumers manage to recover their credit score and sometimes even improve their score within three to six months.
Smart Tips to Open a New Credit Card Without Hurting Your Score
If you are thinking about getting a new credit card these tips will help you to maintain your credit score:
1. Don’t apply if not needed do it only when necessary.
2. Limit your credit cards’ balances to low amounts preferably below 30% of your total credit limit.
3. Pay your credit card bill at least the minimum on time, ideally, every month, the full amount.
4. Don’t close your old accounts if they are well-managed.
5. Do not apply for multiple cards at once and spread them to lessen the impact of hard inquiries.
Is Opening a New Credit Card Bad for Your Credit?
The opening of a new credit card cannot be said to be a negative action against one’s credit score. It might lead to a minor short-term decline but if the card is used properly, the overall effect can be positive. A new credit card is a powerful financial tool for consumers who are planning to build or maintain their credit. It is not a drawback when used wisely.
