Will applying for credit cards damage my credit score?

One of the most-asked questions from beginners is, “Will applying for credit cards damage my credit score?”

This is an excellent question, because there are so many factors that contribute to the answer.  To put it simply, the answer is, “No.”  But I’m sure you would like a longer explanation 🙂

Your credit score is based on a number of factors:

 

 

 

 

 

Notice that “New credit” accounts for only 10% of your total score.

With each credit card application, your score dips slightly – usually 3-5 points.

The effect that credit card applications has on your score decreases steadily over time, ceasing to affect your score at all at the end of 2 years.

In fact, if everything else in your credit profile remains the same, applying for several new credit cards actually increases your credit score after a few months, because of the increase in your available credit.

Credit scores are dynamic; they change from month to month.  I have personally seen my score fluctuate dramatically over the course of a month, based on factors such as owing more than 50% of my credit limit on a single card that month, paying everything off, or applying for a new batch of credit cards.

It is smart to be protective of your excellent credit score.  However, consider this: once you have excellent credit, you will be approved for the best loans and get the best rates regardless of whether your score is excellent or really, really excellent.  In other words, there is a threshold of excellency, and once you cross it, you’re good…if you’ve got a FICO score of 820, you’re not going to get a better rate than if you’ve got a FICO score of 790.

Of course, if you cannot pay off your credit card balances in full every month, you definitely should not be applying for new credit cards.  Also, if you are considering applying for a big loan (car, mortgage, student…) within the next 2 years, then you should limit your credit card applications.  Banks base their lending decisions on multiple factors, and you want to get the best possible interest rate on your big loan.  You can always apply for credit cards after you lock that in 🙂

So, to sum up:

• Applying for 2-3 credit cards will probably only lower your score by 10-15 points (but of course, YMMV…your mileage may vary…because everyone’s financial situation is different).
• The dip in your score will be temporary.
• If you have a big loan in your future, think carefully about whether or not you want to apply for credit cards right now.