The credit score is one of the most important measures in your financial world. Card issuers pull your credit report when you apply for a new credit card. They want to see how much of a risk you pose before lending you a line of credit. This credit check is called a hard inquiry and can lower your credit score by a few points.
Paying off a credit card will not hurt your credit score. It can take a month or two for paid-off balances to be reflected in your score. Reducing credit card debt can result in a score boost, as long as your other credit accounts are in good standing.
Credit cards will affect your credit scores in many ways. From the application to your usage, payment history, and significant role in your credit scores.
If your credit scores are low, even with using your credit cards, you need to take a look at your report and work to improve it. If your credit score is low after getting a credit card, keep reading to find out how to avoid such cases.
Opening a Credit Card Impacts Your Credit Score
While determining your credit score, credit scoring models take a look at your credit card activity. You have more discretion with how you manage credit cards than what you do with other types of credit. How you handle your credit card accounts helps the scoring models to measure what type of risk you pose to lenders.
Credit checks impact your credit score when you apply for a new credit card. There are a few ways opening a credit card can affect your credit score.
Adds Hard Inquiries to Your Credit Report
Lenders inquire about your credit to determine what risk you pose as a borrower. As you know, there are two types of inquiries on your credit report.
Soft inquiries don’t have much of an impact on your credit score. For example, checking a credit report and qualifying for special offers from credit issuers is a soft inquiry.
Lenders perform hard inquiries when they lend you money, and it can affect your score negatively in a short period of time.
Applying for a new credit card will leave a hard inquiry on your credit report, which can lower your score by a few points.
Hard inquiries remain on your report for two years, which will affect your credit score for at least a few months.
Increase Your Credit Mix
If you don’t have a credit card, you may have other forms of credit, like a personal loan or auto loan. These are called installment loans where you do the following:
- You borrow a set amount of money.
- You pay it off in monthly installments.
- You close the account, once all installments are paid.
On the other hand, credit cards are revolving credits. Revolving credit allows you to borrow over and over at a set limit as long you make a minimum payment every month. Any unpaid balance revolves around monthly payments. The credit card company charges interest on whatever balance remains unpaid.
If you hold installment credit, getting a credit card will increase the types of credit you maintain. This is known as a credit mix. If you have both installment and revolving credit, it shows lenders you can manage different types of credit accounts. This helps your credit score. Credit mix accounts for 10% of your FICO Score, which is the scoring model most used by lenders.
Do You Know Using Your Credit Card Can Affect Your Score?
If your credit score is low after getting a credit card, using your credit card can affect your score as well. Your score depends on how you use and manage your credit card. How much you spend on your card versus how you handle payments can do much to improve your credit score.
Credit scoring models weigh payment history more than any other scoring factor. Payment history alone accounts for 35% of your FICO Score. Making all your credit card payments on time every month will help you to improve your credit score. By making the minimum payments within the due date every month, you can greatly improve your credit score.
If you make any-one payment more than 30 days past the account’s due date, it can have a seriously negative impact on your credit score.
To ensure that you do not miss a payment, set up an autopay on your credit card. You should have enough money in your checking account to cover the payment every month.
It is best to pay off your credit card balance each month to avoid interest charges. If you’re unable to pay off your card each month, then try to keep your credit utilization ratio under 30% across your credit accounts. Increasing your credit cards not only hurts your credit utilization ratio, if you are not careful, but it can also make keeping up with payments difficult.
Closing a Credit Card Can Hurt Your Credit Score
When you close a credit card account, you reduce the amount of credit available to you. This can negatively impact your credit score because that account no longer increases your credit utilization ratio.
It is better to keep your credit card accounts open, even the ones that have not been in use for a while. This will help you increase the amount of available credit you have in relation to the debt you owe.
If you are paying high annual fees for cards you’re not using, or if a card is too hard to resist, your credit score won’t take a big hit if you choose to close your account.
If you pay your balances every month and have cards with a long credit history, the effect might be minimal. If you have paid your bill on time every month, your closed account can remain on your credit report for 10 years.
You can get a free credit report from the main three credit bureaus: Experian, Equifax, and TransUnion. It is best to frequently check the report to make sure that you are on the right track, as well as know where you can improve your credit score.
Frequently Asked Questions
1. Will your credit score rise when your credit card gets approved?
You will not have any extra credit when your card gets approved. An inquiry on your credit report has the same impact whether you are approved or denied.
2. How long will it take for your credit score to rise after getting a credit card?
It will take one or two months for the credit card company to report your new information to the three main bureaus. The credit scoring models then calculate the new debt. Upon updating your information, a new score is calculated, and you will likely see an increase in your credit score.