How Does Applying for Credit Cards Affect Your Credit Score?

When I tell people about applying for credit cards to reap the rewards to travel for almost free, one of the first questions I am asked is, "doesn't applying for credit cards hurt your credit score?" The answer is yes and no. Our credit score is derived from a number of different factors, some of which are proprietary. What you should know is that applying for a credit card results in a hard credit inquiry. Hard credit inquiries show lenders that a person has been looking for new credit. A single hard credit inquiry can reduce your score from 2 - 7 points depending on the make up of your credit report. The impact of individual credit inquiries to your credit report diminishes after 90 days. The hard credit inquiries will still be recorded on your credit report, but they will no have much impact on your credit score after 90 days. Credit inquiries stay on your credit report for two years. So 90 days after a hard credit inquiry your credit will likely go up all other factors held constant. This is how applying for credit cards can decrease your credit score.

You credit score is made up of five main factors: payment history, amounts owed, length of credit history, new credit, and types of credit used. The hard credit inquiries fall into the new credit category which makes up 10% of your overall score.

On the other side, getting new credit cards can actually increase your credit score in the long run. This is because another important make up of your credit score is the credit utilization or amounts owed. Credit utilization is the ratio of total credit being used compared to total credit you have available. In other words if you have one credit card with a $5,000 credit limit and during the month you spend $2,000 on your credit card this would be a 40% credit utilization. The lower the credit utilization the better. Generally anything over 20% utilization is a negative factor. When you apply for a new credit card your total available credit increases therefore your credit utilization decrease which is a good thing. Amounts owed makes up 30% of your overall credit score.

There are many strategies for how, when, which, and how many credit cards to sign up for at one time which I will discuss in more detail in a future post. Be aware that in the short run your credit score will go down as a result of applying for credit cards. Also, you are at risk of being declined new credit if you have too many credit inquiries in a short period of time. Proceed with caution!

When starting out in the miles and points game begin with just one or two credit cards for the first 3 months. Make sure you can meet the minimum spend requirements, pay off your credit cards in full, and pay credit cards on time before getting too zealous and damaging your credit. Keep following future posts, I and will discuss in detail best strategies for applying for new credit cards.

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