Does Opening a New Credit Card Affect Your Credit Score?
Thinking about opening a new credit card and wondering how much it will affect your credit score?
In the short term, opening a new credit card is likely to hurt your credit score a little bit, as it adds a hard inquiry to your credit reports and reduces your average age of accounts.
However, in the long run, opening a new credit card can help improve your credit score by boosting the amount of available credit you have, while also reporting your account and payment history to the three major consumer credit bureaus.
We explain how to protect your credit score as you use the new card.
How does opening a new credit card hurt your credit score?
When you apply for new credit, this generates a hard inquiry when the lender pulls your credit report from one or more of the three major consumer credit bureaus (Equifax, Experian and TransUnion) to review your creditworthiness. A hard inquiry typically drops your credit score about 5 to 10 points, and will stay on your credit reports for two years. However, the negative impact on your credit score ends after just one year.
Opening a new credit card can also hurt your credit score by reducing your average age of accounts. Length of credit history makes up 15% of your FICO Score, the scoring model typically used by lenders when deciding whether to extend you credit, and the average age of accounts is part of that factor. For this reason, it’s best to apply for new credit sparingly, allowing the accounts you have to age — the longer your credit history, the more positive it reflects on your credit score. That’s also why it’s important to be judicious when closing old card accounts: Personal finance experts advise to keep old card accounts open and active, as long as it’s not costing you to keep an old card open (such as charging an annual fee).
How does opening a new credit card help your credit score?
The primary way that opening a new credit card may improve your credit score is by improving your utilization ratio, which is the technical term for how much of your available credit you’re using. Credit utilization is also referred to as “amounts owed” and is the second most important factor (after payment history) of your credit score.
For example, if you have a credit card with a $1,000 credit limit with a $300 balance, that’s 30% utilization. A good rule of thumb is to keep utilization at or under 30%, so a $300 balance is right at the cusp in this example. If you open a new card that gives you another $1,000 credit limit, that reduces your overall utilization to 15% ($300/$2,000 = 15%). Note that utilization is calculated both per individual accounts and across all your accounts. Paying off your card or cards in full as often as possible (for instance, at the end of every week) can help ensure your issuer reports a low utilization to the credit bureaus.
So opening a new credit score gives you more available credit overall, meaning if you don’t increase your spending, your utilization ratio should decrease.
Also, if you’re opening your first credit card, this can help your credit score by expanding your credit mix, which makes up 10% of your FICO Score. Note that credit mix does not mean how many credit cards you have from different issuers; rather, it means different types of accounts, such as credit cards and loans (like an auto loan or mortgage).
How many credit cards is too many?
Having at least one credit card is a good thing because it can help you build credit. But how many credit cards should you have? There’s no one-size-fits-all answer. For some consumers, one credit card is enough as long as it reports payment activity to the three credit bureaus. Other consumers may use two, three or even more credit cards to earn rewards in different spending categories.
Just be sure that however many credit cards you use, you can still keep track of your payment due dates. Some issuers allow you to request the due date of your preference, which means you might be able to arrange it so all your cards have the same due date. You could also set up email or text message alerts for when a due date is approaching, or activate autopay so at least the minimum payment is made automatically — on-time payments are the most important factor of your credit score.
How to build credit and keep a good credit score
These are the five factors that make up your FICO Score:
Bearing these factors in mind, here are some tips for how to build and keep a good credit score:
- Pay on time, every time. If you can, always pay off your cards in full. And if you can’t do that, make at least the minimum payment to avoid having a late payment on your record. The good news is that payments aren’t typically reported as late to the bureaus until you’re 30 days past due, so if you realize you’ve missed a due date, act quickly to submit the payment.
- Keep your balances low. You don’t want to max out your credit cards. Utilization is the second-most impactful factor affecting your credit score, and carrying high balances can be a signal to lenders you may be at risk of not being able to pay back what you owe.
- Apply for new credit sparingly. This addresses the length of credit history and new credit factors. You don’t want to end up with numerous inquiries on your credit reports, which can be a warning sign to lenders that you’re desperate for credit. And you don’t want to continually reduce the average age of your accounts by opening new ones, either. Time is a powerful ally when it comes to building credit.
- Maintain a healthy credit mix. Applying for credit products in a responsible way, as needed, can improve your credit score by showing you can manage different types of accounts. For instance, you may take out student loans and open a student credit card while in college, take out an auto loan after graduation and, eventually, apply for a mortgage.
Important credit card terms for new cardholders to know
If you’re new to credit, you’ll want to make sure you understand the relevant terminology:
- APR: This stands for annual percentage rate. With some financial products, APR and interest rate differ, but they mean the same thing when referring to credit cards. Note that some cards offer 0% introductory APR periods on purchases or balance transfers, during which time interest won’t accrue on eligible balances.
- Statement closing date: The last day in your billing cycle is the statement closing date. Purchases that you make after that date (or purchases that post after that date) will appear on the next billing cycle.
- Payment due date: This is the date your credit card bill is due. You’re required to make at least the minimum payment, though it’s better to pay off your balance in full to avoid interest charges. Your due date remains the same from month to month, and some issuers allow the flexibility to request the due date of your choice.
- Minimum payment: Each billing cycle, you must pay at least the minimum due. Your minimum payment is likely calculated one of two ways: either as a percentage of your total balance or as all of the interest owed plus 1% of your principal balance. There’s also typically a threshold for your minimum payment, such as $25, and if you’re carrying less than that on the card you’ll have to pay off your balance in full.
- Grace period: Most credit cards offer a grace period, a window of time between when your billing cycle ends and your payment is due. If you pay your card in full by the due date, a grace period allows you to avoid incurring interest charges. Note, however, that if you roll a balance over from one billing cycle to the next, you’ll be charged not only on the unpaid balance, but also on purchases made in the new billing cycle.
- Late fee: If you pay late, your issuer can charge a late fee. You can be charged up to $30 for your first late payment, and if you have a subsequent late payment within six billing cycles, you can be charged up to $41 for that.
- Penalty APR: In addition to a late fee, missing your payment due date can also trigger a penalty APR, an elevated interest rate. This will apply to new purchases on the card, and if you don’t pay up within 60 days, the higher APR can be applied to your current balance, too. If you trigger a penalty APR, you may take some solace in the fact that the Credit Card Act of 2009 requires issuers to reinstate your regular purchase APR after you’ve made consecutive on-time payments during the six months following the activation of the penalty rate.
- Annual fee: Some credit cards charge an annual fee, which you’ll pay just to have the account. Typically, we recommend looking at credit cards with no annual fee, unless you want a rewards card that offers benefits like airport lounge access, travel protections or credits for certain types of spending.
- Foreign transaction fee: Many cards charge a foreign transaction fee of around 3% for purchases outside the United States. If planning a trip abroad, consider getting a credit card with no foreign transaction fee instead.
- Balance transfer fee: If you plan on transferring a balance from an existing credit card to your new one to save on interest charges, beware that many credit cards charge a balance transfer fee of 3% to 5% of the amount transferred. That means, for example, if you transfer a $1,000 balance to a card that charges a 3% balance transfer fee, you’ll pay $30 to do so. There are credit cards with no balance transfer fee, but they’re relatively rare.
Frequently asked questions
How long will it take for my new credit card to arrive?
It typically takes seven to 10 business days to receive your physical credit card in the mail, though some issuers offer expedited delivery that may have a fee.
Can I use my credit card before it comes in the mail?
Some issuers may provide you with an instant credit card number, allowing you to use it for online purchases or with a digital wallet before your physical card arrives.
Should I close old credit card accounts?
The short answer is “it depends.” When you close a credit card and the account was in good standing, it’ll stay on your credit reports for 10 years, so you don’t lose that positive history right away. However, you will lose that line of credit, meaning your utilization ratio could increase if you’re carrying a balance on any other cards.
Will carrying a balance help me build credit?
No, this is a myth. As long as you’re using your credit card, paying on time and keeping utilization low, you’ll build credit — no need to carry a balance.
Does checking my credit score hurt my credit?
No, checking your credit score doesn’t impact your credit at all. You can check your credit score for free and monitor your progress as you work to build and keep a good score.