Ask an Expert: Will Opening a New Credit Card Hurt My Credit Score?

Photo (cc) by Philip Taylor PT

This post comes from Jason Bushey, who writes about credit cards and personal finance topics daily on Creditnet.com.

A Money Talks News reader recently sent me the following question:

I’m hoping to buy a home in the next year or so. My credit is good, but I want to improve my score even further to get the lowest possible interest rate on a loan. Will opening a new credit card help or hurt my cause?

Thanks,

Sarah

The answer to Sarah’s question requires more of an explanation than a simple yes or no.

Short term

Here’s the deal with opening a new credit card account: In the very short term, opening a new account will cost you a couple of points on your credit score. Why? Because getting approved for a credit card requires a “hard pull” of your credit profile by the card issuer. This happens every time you apply for a loan or credit card, and is the reason you might see your credit score drop a few points after a credit card or loan approval.

Generally, the drop in your score is marginal and easy to rebound from. That said, it’s worth noting that a hard pull of your profile remains on your credit report for two solid years before falling off. A soft pull, on the other hand, is when you pull your own score and has no effect – positive or negative – on your credit score.

So, in the short term, opening a new credit card will negatively affect your score, albeit very little.

Long term

The long-term effects of opening a new credit card account can be extremely positive, assuming you make on-time payments each month and keep your balance low. In fact, opening a new credit card account improves your score in more ways than one:

1. Improves your payment history. According to FICO, more than a third of your credit score is made up of your payment history. A pristine payment history means zero late or missed payments. The longer you go without missing a payment, the better your credit score will be. Adding a new card and making on-time payments each month will enhance your payment history and thus your score.

2. Extends your available credit line. FICO has said that the second-most important factor when determining your score is your credit utilization ratio. This is the amount you owe relative to your total available credit line.

When you add a card to your credit profile, you’re extending your total available credit line and thus lowering that all-important credit utilization ratio. Ideally you want to keep this ratio below 10 percent, meaning if you have a total credit line of $1,000, you should never owe more than $100. This is another reason why it’s extremely important to keep your credit card balance low.

3. Diversifies your credit profile. Finally, opening a new credit card account diversifies your profile if you haven’t had a credit card before. Having different types of credit — credit cards, home or car loans — is another factor that can raise your credit score.

In conclusion

While you might see an initial drop in your credit score upon approval of a new card, the long-term positives far outweigh the short-term negatives associated with opening a credit card account. Opening a new card will be especially useful for Sarah because she has a year to improve her score.

So long as you keep your balance low and your payment history spotless, adding a new credit card to your profile will improve your score in more ways than one.

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