Does Applying For Credit Cards Hurt Your Credit Score?

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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.

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 20 credit cards and my credit score is nearly perfect. 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. That’s because card issuers are concerned whether you’re maxing out your credit card. 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 card that you’re using responsibly, card issuers view that as low risk, because they can see how responsibly you’re using your credit.

A real life example

I have over 20 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 831 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 (apparently 0% — 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.

The only thing on my score that’s not excellent is my average credit age, which is six years and six months. That’s still pretty good.

To be clear, my situation isn’t an isolated incident. For example, when I met Ford several years ago, his credit score was in the low 700s. He was frustrated, because that’s good but not great, and he was worried that if he applied for more cards his score would get worse. Well, he has applied for a lot of cards, and his credit score is now better than mine — it’s 838.

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 or Chase Sapphire Reserve® Card, 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, 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.

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.

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. May be worth saying that Credit Karma is considered a “FAKO” score – so those aren’t your real scores, but estimates based on Credit Karma’s algorithm.

    For many people, they seem to be quite accurate, but for some, I’ve read examples where they were quite a ways off.

    But with many credit card companies now offering a free real FICO score (from one bureau, in most cases, I think), you can definitely get a more accurate picture.

  2. I’d like to add that although it doesn’t hurt your credit score to apply, Chase just closed ALL of my accounts with them because I had been applying for too many credit cards even though I have no delinquencies and never carry a balance on any of my cards with a FICO of 783

  3. One other reason I heard to not apply is if you are planning on applying for a mortgage or other large type of loan in the near future as it may hurt your chances of approval or rate, but I’m sure someone can confirm how true this is.

  4. @Chad – as a data point for the rest of us, can you give us a sense of how many cards you’ve recently applied for and opened?

  5. @Jonny G. I have 10yrs experience as a senior underwriter for a leading regional mortgage firm. Applying for a credit card/chargecard, or any form of consumer debt would not be an issue for me in its own right. Although if you had just opened up a new card and whacked say 30% of your annual income on there within a month I might ask a few questions to determine the reason.

    One thing I should note about Lucky’s analysis is credit utilization is done on an account by account basis. If you have one tradeline (i.e. credit/charge account) where you are using more than 30% of your available credit that will drop your score down regardless of what else you have. It isn’t based on your balances across all of your accounts versus all of your available credit. I’ve had people who have for example an Amazon account with a $500 limit and have charged $400 to it whilst having several other accounts with five digit limits and no balances. Their scores went up by maybe 40pts when that Amazon account was paid to zero and credit was re-pulled.

    Also even if you pay your accounts off in full each month it is typically the balance at the end of your billing cycle that gets reported to the bureaus for scoring purposes. If you are planning on applying for a mortgage or other piece of debt and use a lot of your available credit each month, even if you pay it to zero, I would recommend paying it early so the zero, or small, balance reports at the end of the billing cycle.

  6. @Johnny G – I believe that to be mostly false. As long as your score is above 740, you’ll qualify for an interest rate (for a mortgage or other loan) that is the same as if you have a score of 850.

  7. @ Johnny G — It depends on what your score is, I think. If your score is at the ~750 mark, then holding off on new applications for a bit probably makes sense, but if it’s comfortably over 800 that’s different. We slowed down a little bit in the six months before applying for a loan, but that was mostly because I didn’t want to do the paperwork explaining recent requests for credit. They didn’t care how many cards we had otherwise, as long as they didn’t have balances.

  8. Added to all the reasons above, one of the main reasons I almost never use a debit card is that if it is compromised and fraudulent transactions post that is actual money gone from your account. Of course there is recourse and in almost every case the money will be restored to your account by the bank/financial institution per regulation but in the interim it can cause all manner of issues (i.e. lack of cash, bounced checks or payments, etc). The debit card while convenient is a direct link between the criminal and your account. You and your money are at risk.

    With a credit card none of your funds are at risk. The merchant, the bank and Visa/MC/Amex are the ones at risk and none of your money is jeopardy.

    Finally I would add that the rules and responsibilities for CC vs Debit on the financial institutions are not the same. While they both are supposed to protect the customer the CC rules are more robust and long standing.

  9. @Steven – That is true for all Fannie Mae mortgages. Their Loan Level Price Adjustors do not distinguish between credit for someone of 740 or 800+. That said the way a lot of lenders dress things up and work with intermediaries between origination, loan servicer and FNMA guarantee does mean that some lenders might tell you that you don’t qualify for *their* best rate unless you have a score of 780, 800 or what have you.
    https://www.fanniemae.com/content/pricing/llpa-matrix.pdf

  10. I had 832 score last year. Applied and approved for the BoA Premium Rewards card in September and credit score dropped 40 points! It’s now finally going back up – 814.

    I had two other cards, both of which were over 20 years old.

  11. The best investment you can make before applying for a home loan is in some skin whitening treatment.

    Just do it!

  12. I also recently had chase close all my accounts. Two of which were many years old, but most where all opened in the last few months. Obviously they were concerned that if opened so many accounts so quickly.

    I called them, explained that I’d opened them for earring miles on different types of spend. Learned that here lol.

    My credit score is high, I have a long history with chase and a good income.

    They told me they would reconsider and the check back in a week. 3 days later they called me to tell me they had re-opened all my accounts.

    My advice from this, which would have been obvious to me from the start, is to not apply for too many cards, too fast.

  13. On a similar topic, I recently opened a Capital One Venture card to take advantage of the hotels.com points and intro offer for booking my honeymoon hotels.

    This is not a card I see myself using in the future (I don’t use hotels.com too often and I am working on maxing out the yearly spend on the Aer Lingus card).

    My question is around improving my credit score. This card is hurting my overall credit age, but is improving my credit utilization (although I don’t value that too highly since I don’t keep a balance on my accounts). Would canceling my account improve my credit score by improving my overall credit age, hurt it by lowering my overall credit, or not have any real impact?

    Thank you!

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