Does Applying For Credit Cards Hurt Your Credit Score?

Filed Under: Advice, Credit Cards
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I like to tell everyone who will listen about the huge value they can get by maximizing credit cards and using them responsibly. There are so many great credit cards out there, and those who are using debit cards or paying cash are basically throwing money out the window (assuming they’d be able to use credit cards responsibly, and not rely on credit card financing, other than a 0% intro APR offer).

When I’m talking to a skeptic about credit cards, there’s one misconception I hear more than any other — “but I heard that applying for credit cards is bad for your credit score.”

Is there any truth to that? At the moment I have over 25 credit cards, and my credit score is excellent. Let’s look at how that’s possible.

How your credit score is calculated

Your credit score is made up of the following components:

  • 35% of your score is your payment history (the percentage of payments you’ve made on-time)
  • 30% of your score is your credit utilization (how much credit you’re using compared to your total limits)
  • 15% of your score is your credit age (the average age of your open accounts)
  • 10% of your score is the types of credit you use (how many different types of requests for credit you have)
  • 10% of your score is your requests for new credit (how many times you’ve applied for credit)

Your takeaway here should be that if you make your payments on-time, don’t utilize too much of your credit, and keep your average account age fairly old, that’s 80% of your credit score right there.

How your credit score goes down when you apply for credit cards

When you apply for a new credit card there’s typically a hard pull to your credit. While the exact impact will vary by person, typically each inquiry will ding your score about 2-3 points. That will fall off your credit score within 24 months. Credit scores max out at 850, so a 2-3 point drop is almost nothing.

But that’s the only consistent downside to applying for cards.

The other potential downside (though it doesn’t have to be a downside) is that your average age of accounts is part of your credit score. Let’s say you previously had just one credit card for 10 years, and you suddenly apply for a new card. Now your average account age will be five years. The way to prevent this from being a problem is to keep a few credit cards open for a long time.

How your credit score goes up when you apply for credit cards

The above cover the limited downsides to applying for credit cards. An inquiry could lower your score by a couple of points temporarily. But you can see huge positive improvements to your credit score when you open new credit cards.

The most basic reason for this is that you’ll have a lot more available credit, and the percent of credit you utilize and your ability to make those payments on-time makes up 65% of your score.

For example, say you currently have one credit card with a $5,000 credit limit, and you spend $5,000 on it per month. You’re utilizing 100% of your credit.

To give an extreme example, say you then have 10 credit cards with a $5,000 credit line each, and you still spend $5,000 per month. You now have $50,000 of available credit, but you’re now only utilizing 10% of your credit.

This will have a hugely positive impact on your credit score. Why? Because it raises a red flag when you’re using almost all of your credit.

If you’re using all the credit that you have available, they wonder what will happen if they give you more. Meanwhile if you have a lot of credit that you’re using responsibly, card issuers view that as low risk, because they can see how responsibly you are.

A real life example

I have over 25 credit cards, so let’s take a look at my actual credit score and details. On a scale of 300 to 850, my credit score is 834 and 828 with Transunion and Equifax, respectively. That’s a pretty close to perfect credit score.

Then there’s a more detailed description of what comprises my score:

As you can see here, on the high impact areas I do very well — I have very low credit utilization (1% — that’s how much available credit I have), I make 100% of my payments on-time, and I have zero derogatory marks. Those are the most important things on your credit report, and my credit utilization wouldn’t so low if I didn’t have so many cards.

Furthermore, my average age of accounts is even quite good thanks to the cards I’ve had open long term, which always help keep that number up.

To be clear, my situation isn’t an isolated incident. I get emails all the time from people who have scores in the low 700s and are confused, because they point out that they have one credit card and use it responsibly.

They’re worried their score will go down if they apply for more cards, but in almost all cases their scores go up in the long run when they get more cards and use them responsibly.

Why you might want a lot of credit cards

The logical follow-up question is “okay, you can have a lot of credit cards, but why would you want to?”

Well, first and foremost my goal is for those of you who are exclusively using debit cards to instead switch to credit cards, assuming you can use your credit responsibly (it’s almost never worth carrying a balance on a credit card).

Way too many people only have debit cards, so it’s time to start building your credit and realize that applying for credit cards can potentially help your score, rather than hurt it. Pick up a card like the Chase Sapphire Preferred® Card (review) or Chase Sapphire Reserve® Card (review), which offer easy to use points and great bonuses on spend.

If you don’t want to get into points, pick up something like the Citi® Double Cash Card (review), which has no annual fee and offer 1% cash back on every purchase, and then an additional 1% cash back when you pay for those purchases. These rewards can now even be converted into valuable ThankYou points.

But why would you want to have many credit cards?

Bottom line

There are a lot of misconceptions about credit cards, though probably the most common involves the belief that applying for credit cards will hurt your credit score. This simply isn’t the case, at least if taking a long term approach to credit cards.

In the short term you will be dinged a couple of points if you apply for a credit card, though the long term benefits more than outweigh that, including your decreased credit utilization and positive payment history.

There’s similar confusion about the impact that closing credit cards has on your credit score, so see this post for more details on how that works.

Hopefully this inspires at least a few of you with debit cards or limited credit cards to start maximizing your points!

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Comments
  1. Is there any downside to just locking a card up at home and never using it? (Or is that what you actually recommend?) Does your credit utilization factor consider what accounts are being used, or not?

    I still have the first credit card I got when I was 18 and don’t use it anymore. I’m trying to weight the benefit of keeping my oldest account open vs any negative of never putting anything on it. Thanks!

  2. Lucky, another misconception is that paying a credit card annual fee is stupid. Whether an annual fee is stupid or not is all relative to the value that you receive for the annual fee. Example #1, my Alaska Airlines visa card has a $75.00 annual fee. Even though I probably earn more value in miles over the year to cover the $75.00, the sweet spot is the annual companion voucher. If I use the companion voucher correctly, it could easily be worth over $500.00. My AMXE Hilton Aspire card comes with a $450.00 annual fee. I get a $250.00 airline credit, free weekend hotel night, priority pass membership, $250.00 hotel credit and $100.00 Conrad or Waldorf credit. These perks can also increase in value with increased use over the year. I laugh at people who tell me how stupid I am because I make money off annual fee cards.

  3. The screenshot of your credit report showing your score being above 800 doesn’t prove that it is actually yours.
    No offence but I mean we all can find this picture online and post it as ours. I seriously doubt with the frequency and amount of hard inquiries you have your score is even close to 800. it is more like 690s at best.
    This “stories” could probably work for somebody in their teen years. Nice try though:)

  4. Um. People who use credit cards spend more than people who use cash. Proven over, over, over and over again. There is no such thing as using a credit card responsibly.

  5. Anecdote time:

    My last 3 cards, I applied for within 8 months of each other, my score only gets dinged about 10 pts after the report reflects the inquiries, only to raise back up to normal within a month or two.

    I got dinged harder after I paid off my car loan and became debt free, with a “insufficient mix of credit” as the negative. Go figure 😐

  6. I applied for a few cards last year – Bonvoy Brilliant, Amex Gold, Amex Platinum, World of Hyatt, and just recently the Ink Preferred. In each case of a hard pull and subsequent showing of a new account on my report, I saw a drop of around 15 points. It did eventually rebound, but only after a few months.

    Note that Bonvoy Brilliant, Amex Gold, and Platinum were not hard pulls. I think this is common with Amex if you already have accounts with them. However, the accounts do show up and result in a drop. Chase did a hard pull for both of my cards, but the Ink doesn’t show on your report as it’s a business card.

  7. @Lucky often mentions & recommends the Citi Double Cash card. I applied and was approved for it last week. However, the *reason* I want this card is not one that @Lucky mentions. This card supports Virtual Credit Card numbers and does so without even an Annual Fee. BofA used to have a VCC feature, which they called “ShopSafe” on their VISA cards. They recently cancelled the feature with no warning. So, hopefully, the Citi DC card will replace what I used the BofA card for in the past. If you’re unfamiliar with Virtual Credit Cards, do a little Googling. The feature essentially makes it easy for you to combat *annoying* vendor practices like Auto Renewal “for your convenience.”

  8. No one should be using the scores displayed on Credit Karma as an accurate measurement of their credit score…guarantee it differs significantly from your actual true FICO score. Also it is very possible to have a lot of cards and a great score. Have ~12 current open cards and my FICO has been 790-800.

  9. My credit profile is almost identical to Lucky’s except I have may be 20 cards.
    My credit score is identical too. So @Roman, you are wrong.

    And yes there is responsible credit use, may be not for those who spend beyond their means and can’t payoff their bills at the end of the month.

  10. Xtina, don’t close your oldest card. I tried that on the Chase credit score simulator, it would drop my score by 139 points, ouch! Ak, wrong, I spend exactly the same amount of money, and I pay everything with CC’s. I pay off every card and every bill the day the statement arrives, which to me is being very responsible.

  11. He can probably lower those scores by 20+ points or so using a real credit score like FICO 8. That “vantagescore 3.0” is always consistently much higher every time I check.

  12. You mention the AMEX Green Card, which is a charge card, not a credit card.
    What impact do charge cards have on the credit score? Given that they don’t have a “credit limit”, how would they influence the % of credit used?

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