The common belief is that opening a new credit card account will hurt your credit score.
Is this really true?
There are five different factors that affect your credit score and the factors each have their own weight. Knowing these factors gives you a better understanding of how your credit score would be impacted in both the short-term as well as the long-term by opening a new credit card account.
First let’s look at the impact of a new credit card account immediately after opening:
Applying for a new credit card triggers a hard inquiry or “hard pull” of your credit. Hard inquiries stay on your credit report for two years but only ones in the last 12 months affect your credit score. The more hard inquiries you have on your report the riskier you appear to lenders.
Types of Credit
If you do not currently have many open credit card accounts, opening a new account from a bank makes your credit file look more well-rounded. With each new one, the impact is lessened.
Length of History
There are a few factors that affect length of history: the length of oldest account, length of newest account, and average age of all accounts. A new account doesn’t change the length of your oldest account but it lowers the length of your newest account as well as the average age of all your accounts.
Immediately after opening a new credit card account, you have increased your total available credit without making any purchases, lowering your total utilization ratio as well as adding a new account with a 0% utilization ratio.
With a brand new credit card, you obviously don’t have any payment history.
Now let’s look at the long-term impact of opening a new credit card account to your credit score. For the sake of this article, let’s say long-term is 2-3 years.
After one year, the hard inquiry no longer affects your credit score. It will still remain on your credit report for an additional year before it rolls off completely.
Types of Credit
The impact on types of credit is the same as immediately after opening.
Length of History
In theory, the way to maximize length of history is to open one account and never open another. As time passes, your length of history gets better and better (assuming you don’t cancel old accounts) and eventually you have enough accounts with a long history that a new account will not bring down the average as much.
The new credit card should not have changed your spending habits. Similar spending with a higher total credit limit gives you a lower utilization ratio.
Assuming you are making your payments on time, you’ve now built an even greater payment history than you would have without the new account, the most important factor in your credit score.
Unless you trigger lots of hard inquiries in a short period of time, the immediate impact on your credit score is slightly negative on average. According to myFICO, one additional credit inquiry typically takes off less than five points from your credit score, nothing to be concerned about. However, if you know you are going to be applying for a mortgage or car loan in the near future, it is prudent to hold off on credit card applications until afterwards. You don’t want to risk a slightly lower credit score causing you to lock in a higher interest rate for years.
Typically, your credit score rebounds after 2-3 months of making payments on-time and keeping balances low. Over the long-term, the negative impact of a hard inquiry dissipates and your additional history makes your credit score stronger.