Whenever you go to your bank, do online banking, or even visit certain retail stores, you might be prompted about applying for a new credit card. While some of these cards may be worthwhile, you shouldn’t say yes right away. You need to think about the overall benefits, your personal financial situation and how it affects your credit score.
Does applying for a credit card affect my credit score?
The short answer is yes, but it’s not that simple. Whenever you apply for a credit card, a hard credit check which affects your credit score is performed on your credit profile. When this happens, your credit score takes a hit of about 5 – 10 points. That’s because a hard inquiry is a detailed look at your credit history. This is essential for credit card providers as they need to determine how creditworthy you are.
As a general rule, if your credit score is high, you have a much greater chance of being approved for a credit card. That said, other factors, such as your income and outstanding debt, may also impact the decision-making process.
What's the difference between a soft and hard inquiry?
A soft inquiry is more of a quick look at your credit profile, and it does not affect your credit score. Many financial institutions may do this to prequalify customers for specific products. They would then tell those customers that they’re prequalified and to apply now.
The advantage here is that customers will know that they have a high chance of being approved for the products since they’ve been prequalified. That said, a hard inquiry would still need to be done if they decide to formally apply.
Can a new credit card improve my credit score?
Even though applying for a new credit card will immediately impact your credit score, it will go back up over time as long as you pay your balance on time and in full. In addition, your credit score could actually increase in the long run for a variety of reasons.
First, it gives you access to more credit. One factor that determines your credit score is your credit utilization ratio. For example, if you have a single credit card with a limit of $5,000 and typically charge $2,000 to your card each month, then you’d have a credit utilization ratio of 40%, which is considered high. However, if you applied for another credit card and were approved for a limit of $5,000, your utilization ratio would immediately drop to 20%, which is under the 30% ratio recommended by the credit bureaus.
What’s the difference between prequalification and preapproval?
As mentioned, prequalification is when lenders will do soft inquiries to see if you’d likely be approved for a certain product. With the preapproval process, you’re formally being approved in advance, so you know what you have access to. When being preapproved, your credit score would take a hit.
The prequalification and preapproval process typically applies to mortgages. It’s unlikely you’d ever get preapproved for a credit card, as it’s the same process as a formal application.
What happens to my credit score if I’m declined for a credit card?
The hit to your credit score applies during the application process, so it doesn’t matter if you’re approved or not. The damage has been done to your credit score already. That said, if you’ve been declined, you may want to investigate why that happened, especially if you have a good credit score.
Sometimes it might be something out of your control, such as the bank having its own rules. There’s also the possibility that you don’t meet the income requirement.
How often should I apply for a new credit card?
How often you apply for a new credit card is entirely up to you, but there are a few things to consider:
Every time you apply for a new credit card, your credit score takes a small hit.
Applying for multiple credit cards in a short period of time could negatively impact your credit score as the credit bureaus will wonder why you need access to so much credit.
Even though your credit score will drop when you apply for a new credit card, your credit score will likely increase again after a few months as long as you’re paying your bills on time.
Every credit card provider has different requirements for approval. Just because you’re approved for one card doesn’t necessarily mean you’ll be approved for another.
Do prepaid credit cards affect your credit score?
In most cases, prepaid cards do not build your credit score. That’s because you’re not actually accessing credit. You’re only using funds that you’ve preloaded to your card. That said, there is an exception. KOHO is a prepaid card that allows you to build your credit score as long as you sign up for the optional credit building feature.
The bottom line
Regardless of whether you’re approved or not, applying for a new credit card will affect your credit score negatively. That said, it’ll only be a few points and it will go back up after a few months if you continue to use your credit responsibly.
Barry Choi is an award-winning personal finance and travel expert. He regularly appears on various shows in Canada and the U.S., where he talks about all things money and travel. His website - Money We Have - attracts thousands of visitors daily, looking for the latest stories on travel and money.