How Does Applying for a Credit Card Affect My Credit?

Estimated read time: 2 minutes

Applying for a credit card is as simple as clicking a button these days. Online marketplaces like Amazon, eBay, and make it easier than ever to finance your purchases without ever leaving your couch. Whether you are trying earn travel rewards, increase your credit score, or hoping to earn extra cash back rewards, you might be interested in applying for a new credit card. But before you click on that button, you will need to understand these four important facts about credit.

New credit card inquiries come with a cost

When you apply for a new credit card, the credit company will request an official record of your credit history. This official request for credit information is also known as a "hard inquiry."

Hard inquiries may impact your credit score more than think. Your credit score, which can range from 300-850, is calculated by a combination of five factors. One of these factors is applying for new credit accounts. The FICO score model, which is used by a majority of US lenders, contributes towards 10% of your credit score from new credit inquiries. The more hard inquiries on your credit report, the greater the impact on your credit score.

Hard inquiries stay on your credit report for two years

If you have a shorter credit history or do not have many credit accounts open, applying for a new credit card could affect your credit score more than those with a longer and stronger credit history. Positive things that can contribute to a healthy credit history include on-time payments, different types of credit (such as mortgages, automobile loans and credit cards), low balances on credit accounts, and keeping accounts current for a long period of time.

Not all inquiries are made the same

Some hard inquiries, like automobile or mortgage applications, may impact your score less than others. This is mainly due because consumers shop around for the best interest rate or terms. In these instances, the FICO developers created a safety net for these multiple inquiries and generally consider them only one inquiry when made within one month's time. Soft inquiries usually do not impact your credit score because these type of inquiries are not made in an official capacity.

The good news is that if you receive a credit offer in the mail, you are probably doing something right!

Consider your financial goals

Applying for a new credit card has its perks. By using credit cards wisely, you can build your credit history and increase your credit score. Some credit cards offer cash back rewards, airline miles, or retail discounts. Secured credit cards can help to repair or build history. Even though new credit accounts affect your credit, the impact on your FICO score is limited to one year even though your credit report will include this for two years. In the end, it all comes down to the type of financial goals you have when you consider applying for a credit card.

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