Credit card signup bonuses are often considered the holy grail of affordable travel. Sign up for a new rewards credit card or travel credit card, hit a minimum spending requirement, and earn a bonus big enough to pay for several hotel nights or a free round-trip flight. If you’re into cash-back instead, you can also parlay your rewards into several hundred dollars in statement credits instead.
Obviously, everyone loves free money, and it doesn’t get any easier than this.
But, the process can become addictive. After all, one signup bonus can easily turn into two…then three…then four. Sign up for a card, earn the bonus, then rinse and repeat. All of a sudden, you’re earning thousands in free travel or cash-back without a lot of hassle or work.
The problem is, opening too many cards can have an impact on your credit score. On the flip side, the impact of new credit is usually drastically overstated.
The Downsides of Opening a New Credit Card
First things first. Yes, it’s absolutely true that opening new credit cards can temporarily ding your score. While there are nuances that can affect how big of an impact you’ll see, the major downsides of opening new credit are as follows:
A hard inquiry is placed on your credit report any time you open a new account. Any time you apply for a new credit card, the creditor needs to access your credit report to determine your creditworthiness. This will result in a “hard inquiry” being placed on your credit report.
Since “new credit” makes up 10 percent of your FICO score, the effect of hard inquiries is fairly minimal. Keep in mind, however, that even one hard inquiry can cause your credit score to dip. The good news is, most negative impacts are only temporary.
The average age of your credit history goes down when you open a new account. The average age of your credit history is another factor used to determine your credit score. Using the FICO scoring method, the age of your history makes up 15 percent of your score.
Each time you open a new card, the average age of your credit history goes down for obvious reasons. This is one reason why many experts suggest keeping old cards open whether you use them or not. Your oldest cards can lengthen the average age of your credit history - even if they’re tucked away in a drawer.
If you run up a balance, your credit utilization could also take a hit. If you’re opening a new card because you want to charge up a large balance, there’s a chance your credit utilization will increase and bring your credit score down with it. Unfortunately, the amounts you owe on your credit cards in relation to your credit limits make up 30 percent of your credit score. No matter how you cut it, that’s a lot!
Then again, you shouldn’t carry a balance on your credit cards if your goal is earning rewards. If you carry a balance and pay interest each month, your interest charges will wipe out any rewards you earn and then some.
Here’s Why Your Credit Score Could Actually Go Up
While the factors listed above can absolutely bring your score down temporarily, here’s where this myth gets busted. Believe it or not, opening a new credit card can actually cause your credit score to go up!
This is especially true if you’re opening new cards in pursuit of signup bonuses and ongoing credit card perks. If you’re in it for the rewards, you should never carry a credit card balance (although your statement may occasionally close with a balance on it). Here’s how this works: When you open a new credit card and don’t run up a balance, you’re actually boosting the amount of available credit you have. This, in turn, lowers your overall utilization and can cause your credit score to increase.
Another way that opening a new credit card can increase your score is by broadening the types of credit you have. Believe it or not, your “credit mix” is another factor that makes up 10 percent of your FICO score. By adding a credit card to the mix (especially if you don’t have many credit cards already), you can improve the diversity of your credit types.
Lastly, opening a new credit card and using it responsibly adds yet another feather to your cap. When you pay your balance on time each month, your credit movements are reported to the three credit reporting agencies – Experian, Equifax, and TransUnion. Over time, these positive reports will improve your score and add even more depth to your credit history.
The Truth About Your FICO Score
While it’s true that opening new credit cards can ding your credit score, albeit temporarily, understanding how your FICO score is determined might put your mind at ease. According to myFICO.com, the following factors are used to decide where your personal FICO score falls on a scale of 300 to 850:
- Payment History: 35 percent
- Amounts Owed (Utilization): 30 percent
- Length of Credit History: 15 percent
- Credit Mix: 10 percent
- New Credit: 10 percent
As you can see, more than half of your FICO score is determined using two important factors – your payment history and how much money you owe. While the other factors we mentioned play a role, their impact isn’t nearly as great.
With that in mind, it’s important to remember you have a lot of control over the quality of your FICO score – even if you do decide to open new cards. By paying all of your bills early or on time and by keeping your debts at a minimum, you can ensure the top two factors impacting your credit score leave only a positive impact.
The Bottom Line
Opening a new card can absolutely impact your credit in a negative way, albeit temporary. While you shouldn’t lose sleep over a small ding to your score, caring about your credit is always a good idea.
At the same time, the best any of us can do is focus on our locus of control. By paying bills early and never carrying a balance, we can give ourselves the best shot possible at a stellar score no matter how many new cards we have.
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