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Credit Card Soup – Should You Be Applying?

With a variety of rewards programs and upgraded terms aimed at capturing new users amid a broader shift to a cashless society, you may be asking yourself whether now is a good time to apply for a credit card. What you may not realize, however, is the impact this would have on your credit score.

Generally speaking, opening up a new credit card should only have a minimal adverse impact on your credit score up front. With time, though, being approved for a new card can actually boost your score and increase your credit worthiness!

Let’s take a closer look at what the more immediate negative impacts are first. When you seek out and apply for a credit card, you’ll likely cause a “hard pull” on your credit file, where the issuer will scan your report and determine if you should be approved/what limit to offer you. Note that this inquiry is placed upfront and generally dings your score by a small amount. This is also why you should not just apply for multiple cards over a short time period. Now, unlike a hard pull, however, there is also something called a “soft pull,” which is done when companies send you unsolicited offers after reviewing your credit report without your direction. These soft pulls would not lower your score.

Opening a new card also lowers the average credit history age. This is particularly impactful if most of your other credit cards have a long history, as a new card would then lower the average age of all of your credit cards. This is also why it’s not advised to actually close any of your credit card accounts, as your history would then be shortened and lenders have a smaller sample to judge your credit worthiness by.

Now that we have discussed how your credit score would likely be dented with a new credit card on file, it’s worth discussing a concept called credit utilization and how adding a new card can actually benefit your score.

Credit utilization is essentially how much you spend on credit cards in relation to how much your aggregate credit limit is. For example, if you have made purchases worth $2,000 across all of your cards in a given month and the total limit of those cards is $8,000, your credit utilization is 25% ($2,000/$8,000). Let’s say a new card that you have just gotten approved for offers a credit limit of $4,000 now; your total available credit in aggregate goes from $8,000 to $12,000. If you don’t make any purchases on this card (or you do, but lower it as much on another card) and therefore still spend $2,000 the next month, your updated credit utilization is now 16.67% ($2,000/$12,000). In the eyes of lenders, the lower the utilization rate, the better.

One thing we do want to make clear is that you should really only apply for a card if needed and not just to boost your available credit with an eye on increasing your score.

Bottom line, manage your debt – use credit wisely and pay off at least the minimum (but optimally, the full balance) each month, without missing the deadline.

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