credit card advice
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To get a credit card in your own name, you’ll need to complete and submit an application. Even if you are preapproved, you’ll have to actually apply before the card is sent to you in the mail. That step results in a hard credit inquiry being noted on your consumer credit report.
So will the very act of applying for that account negatively affect your credit scores? It can, but much depends on your credit history.
Here’s what you need to know about new credit card applications, how they can affect your credit scores, and what you can do to offset potential damage.
Credit Inquiries Are Listed On Your Credit Report
Every time you apply for a credit product, whether it’s a credit card, loan, financing agreement, or line of credit, the lender will notify the three major credit bureaus (TransUnion, Equifax, and Experian) that you did.
A hard credit inquiry will appear on your credit report and will remain for a total of two years, though credit inquiries are only factored into your credit scores for the first year they appear.
Soft credit inquiries also show up on your credit file. These happen when a business looks into your credit file to see whether you would be an appropriate customer for one of their products (which is why you may have received a preapproval letter for a credit card).
A soft credit inquiry is also noted when you check your own credit reports. These inquiries are never factored into your credit score and are not visible to anyone but you.
How Hard Credit Inquiries Affect Credit Scores
Several credit scores are on the market, but the two most commonly used by lenders are the FICO Score and the VantageScore. Each pulls the information that appears on your credit report and then inputs that data into their proprietary algorithms.
Credit scores range between 300 and 850, and higher numbers indicate less credit risk. Every month these companies run the numbers, so your scores will adjust upward or downward with your most recent activity.
Although credit scoring companies do not publish the algorithm they use, they do offer general guidelines as to which information carries the most and the least weight.
To know how applying for a credit card can affect your scores, you’ll first need to understand where hard inquiries fit in with other scoring factors:
- 35% payment history — whether you’ve paid past credit accounts on time
- 30% amounts owed — the amount of money you currently owe to creditors, including credit utilization on revolving credit products
- 15% length of credit history — when you opened your credit accounts, including the age of your oldest and newest accounts, how long specific credit accounts have been established, and low long since you used certain accounts
- 10% credit mix — the variety of credit cards, retail accounts, installment loans, finance company accounts, and mortgage loans you have
- 10% new credit — hard inquiries aka applications for credit and loan products
The 10% hit on your score when you apply for a new credit card is far less important than the way you use the card once you have it.
- 41% payment history — whether you pay your bills on time
- 20% depth of credit — age and types of credit accounts you have
- 20% credit utilization — the amount of credit you use and have access to
- 11% recent credit — the number of credit accounts you recently opened and the number of hard inquiries on your report
- 6% balances — total debt on all of your credit accounts
- 2% available credit — the amount of credit you have available on revolving credit accounts
VantageScore also ranks an application for a credit card among the least important factors as it is included in the 11% “recent credit” category.
Why Hard Inquiries are Important to Lenders
Credit scores were developed so businesses could make swift and accurate decisions instead of having to review all the details on a borrower’s credit report. This instant read is particularly valuable to lenders.
So why is your history of applying for credit cards and any other credit product relevant to a lender? As with all information on a credit report, it’s about patterns of behavior and what they can mean for future actions.
A couple of credit card applications over a long period doesn’t trigger a negative response from lenders because they certainly know you have to apply to obtain a credit card.
But if you applied for many cards in a short period, lenders may view it as an indicator that you’re in financial trouble. It’s possible that you are seeking the ability to charge large sums of money because you can’t pay for what you need any other way.
Each credit card application you submit will be counted as a separate hard inquiry, but not all loans will. If you are shopping for the very best interest rate on a mortgage, you may have to apply to find out what it will be. That’s why multiple hard inquiries for a home loan made within the same 14- to 45-day span, depending on the credit scoring model, are considered a single inquiry.
When Hard Credit Inquiries Count More
If your credit scores are high, you may see a few points temporarily shaved off after a credit card application. But hard inquiries can have a particularly strong impact on your credit scores under a few circumstances:
- Limited credit history: If you are new to the world of borrowing, you do not have much or even anything listed on your credit report. In that case, you have what’s known as a thin credit file. Hard credit inquiries will take on greater scoring weight because all the information that creates a good credit score, such as paying your bill on time each month, has not started to appear yet.
- Poor credit: Credit card applications may have a stronger effect on your credit scores if your scores are already low because you have derogatory items on your credit report. If your credit report shows that you have fallen behind on payments, your accounts have recently gone into collections, or you owe a significant amount of money, a lender may assume that you are applying for a credit card because you don’t have enough money to meet your expenses. That makes you appear to be a greater credit risk.
Get the Best Credit Card Without Damaging Your Credit
The good news is that you don’t have to harm your credit when you are looking for a credit card. Even if the application process removes a few points from your scores, you can quickly rebound by using the credit card responsibly.
Your first step will be to find out what your credit scores are now. You can order your credit scores for a fee from the FICO and VantageScore websites, though you may be able to get them for free from their partners.
When you know your credit scores, you can pursue a credit card that fits within that scoring category:
After you know your credit score, research the credit cards that match your scoring range and fit your lifestyle. Accounts are available for virtually all credit scoring profiles and needs.
For example, credit cards are available for no credit, bad credit, fair credit, good credit, and excellent credit histories.
Read each offer carefully and identify the one in your scoring category that makes the most sense for you. Almost all credit card issuers allow you to apply online. You will receive a response within seconds, and as long as you apply for a card that is right for your credit score, you should be accepted.
In the event that you are denied, slow down and figure out what happened. You will receive an Adverse Action Notice that explains why you didn’t qualify, and it could be because your income wasn’t sufficient. Credit scores are the major qualification factor, but issuers also want to be sure that you have enough money to satisfy the debt you can get into with a credit card.
Use Your New Card to Your Scoring Advantage
The credit card issuer will make a note on your credit file that you applied for the card and will also send information about the new account to the credit bureaus. That information includes when the account was granted and the amount you can borrow, which is called the credit line or credit limit. This information will appear in the trade lines section of your credit file.
Once you have the credit card and start to use it, your activity will be recorded in your credit file. Most important will be that you pay your bill by or before the due date because payment history is the number one credit scoring factor for both credit scoring companies.
You will also want to keep the balance at zero or very low. This will ensure that your credit utilization ratio will remain open, which is an indicator that you are using the credit card as a convenient payment tool rather than borrowing for the things you can’t afford.
This regular and responsible behavior will help increase your credit scores as each month passes. Then, if you want to obtain another credit card, you are prepared to apply with even higher credit scores.
Another hard credit inquiry will show up on your credit file, of course, but if you have plenty of other positive information listed, the impact of that notation will be minimal. You can quickly regain the lost points (and exceed the old score) by using both accounts responsibly.
The Bottom Line on Credit Card Applications
You have no reason to worry about how a credit card application will hurt your credit if you approach the process systematically. You are going to have to accept that your scores may drop by a few points for the very short term because there is no other way to get an account.
After you get the card, simply manage the account in a way that supplies a steady stream of evidence that you really are a terrific credit card customer.