Embedded Files
Author: Matthew March 13, 2024
Won't applying to credit cards hurt my credit score? Yes and No. There are a lot of nuances with how your credit score is calculated and how getting new and using your existing credit cards affect it. This week's blog post takes a general overview on the factors of one's credit score and what it means for going on the credit card journey. And as a quick refresher, having a good credit score will help you obtain favorable loan rates (e.g., mortgage interest rates, car loans, etc.). A good/bad credit score tells lenders how well you handle paying off debt. It is not necessarily indicative of your financial knowledge or income earned.
To note, this is a synthesized summary with research taken from the 3 major credit bureaus themselves (Equifax, Experian, and TransUnion). In terms of how credit cards application, usage, and closing will specifically affect your credit score can vary based on the formulas no one outside the credit bureaus know. This blog post is to help reveal some answers to common questions we get. Finally, business credit cards will affect some factors different. That information will only be available to subscribers of the WuhooPoints weekly newsletter.
Factors that Affect Credit Score
Factors that Affect Credit Score
(KEY)
(KEY)
Factor Name (estimated percentage factor based on 3 credit bureaus)
Factor Name (estimated percentage factor based on 3 credit bureaus)
What a "good" score looks like
Description
What this means for credit cards
Pointer 1
Pointer 2...
On-time payments (~35%)
On-time payments (~35%)
Excellent = 100%
All the credit bureaus and FICO agree that this is the most important piece of having a good credit score. Lenders want to make sure you're trustworthy enough to pay your money back on time, without any issues. It is therefore so important to pay all your credit card balances on time and not spending more than you can afford.
What this means for credit cards
Set up Auto-Pay - I can't stress this enough to all clients. Set up auto-pay so your statement is paid automatically each month from your checking or savings account. Even if you've built good habits to check and pay your statement, it's a good precaution to add in case of emergencies or you simply forget. One late payment can significantly ding your credit score.
Pay the statement balance - The keyword here is statement balance. Many people pay the full balance on the due date or at the end of the month. While that's a good place to start, you're only responsible for paying the statement balance off each month to avoid paying late fees or interest. On the other hand, I've heard people say, "leave a little debt and pay interest to show the banks you're a valuable borrower." No, don't do this. Even if this were true, it's not worth paying that extra interest, when you can focus on the factors that actually matter to banks and your credit score.
The more cards you have the more on-time payments you have - How on-time payments is calculated is dividing by the number of on-time payments made by the number of payments due. Someone with one credit card for a year will have 12 on-time payments (one for each month) while someone with 4 credit cards, each for a year, will actually have 48 on-time payments. In terms of late payment, if they both miss just one payment, the first person will have a 91.6% (11/12) on-time payment rate, while the latter will have 97.9% (47/48) on-time payment rate. Regardless, it's best to always pay on-time and even if you had late payments, getting a new credit card just to up your rate is probably not wise. The point is that by having multiple credit cards, you demonstrate more on-time payments to lenders.
Utilization (~20%-30%)
Utilization (~20%-30%)
Excellent = 0%-10%
This is the ratio between how much credit you've used and how much total available credit banks have given you. Lenders don't want to see high utilization because it looks like you might be strapped for money.
What this means for credit cards
Don't worry about utilization fluctuations - Sometimes, when a client makes a big purchase (i.e., over $1,000) they freak out after seeing their score drop. Yes, using more of your available credit drops your credit score, but in the same vein, after you pay off your balance next month, the score will likely go right back up. Unless you're taking out a loan or mortgage soon, it's okay if your score drops a little after making a large purchase.
The more cards you have the lower utilization you'll have - Assuming your level of spending remains the same after getting new cards, your available credit will increase, lowering the ratio of how much you're using. Even though the credit bureaus can see if one card is close to maxing out, generally they look at all your cards and available limits holistically to generate your score. Getting new cards therefore generally increase credit scores over time as the available credit gets reported out.
High balances are also considered separately - Not only is the ratio analyzed, sometimes the balance (or total money owed) factors into the credit score independent of available balance. For example, two people could have the same utilization percentage, but one person is spending $1000/$10,000, while the other is spending $10,000/$100,000. The higher $10,000 balance could potentially ding the score ever so slightly.
Credit History (~15%-20%)
Credit History (~15%-20%)
Excellent = 25+ years
Probably the most self-explanatory, credit history is the measure of how long your oldest account is. Lenders like a longer credit history as it again demonstrates your credit-worthiness. Unlike the above factors, this score just focuses on the oldest line of credit you have, most likely a credit card. If that account becomes closed, it may still show up on your reports, but the credit score will then factor in the next oldest card.
What this means for credit cards
Keep your oldest card - The general wisdom is to keep your oldest credit card open forever if you can. Fortunately for most people, their oldest card doesn't have an annual fee so it's likely they can sock drawer it forever to keep the length of credit history long.
8+ years is good - This is only anecdotal, but after I had my credit history reach 8 years, my score jumped up significantly. According to some banks and their credit score-equivalent trackers, it seems that 7-8 year threshold does help a lot. So while 25+ years is excellent, patience is key and you'll still get a boost from having just another year added again and again.
Credit Mix (~10%)
Credit Mix (~10%)
Excellent = 3+ different types of loans
There are different types of debt you can take: mortgages, student loans, credit cards, lines of credit, and more. Having different types and managing them well looks responsible to lenders.
What this means for credit cards
Credit cards can affect your future loans - Obviously this whole blog post is about how credit cards can affect your credit score. Your credit score is important for future loans you may take for your house, car, or something else. We've talked about ways credit cards can both improve and damage your credit score, and in the same way they do the same to your future loan potential.
Don't apply to credit cards ~6-12 months before getting a loan - The conventional wisdom is to not apply to new credit cards 6-12 months before applying for a large loan like a mortgage because it looks like you're in need of credit and then lenders might not give you as favorable of a rate. Any earnings you can get from a credit card sign-up bonus will be wiped with a higher interest rate.
Don't get new loan types for the sake of the score - With these last few factors, the impact to your score is so low that it's definitely not worth getting different loan types solely for the sake of getting different types. It won't help nor hurt your score that much.
Credit Checks (~5%-10%)
Credit Checks (~5%-10%)
Excellent = 0
Credit checks, or hard inquiries are when businesses such as banks, lenders, car dealerships, or any place looking to give you a loan check your credit score/history. Just having this check gives you an inquiry and thus a ding on your credit score. Fortunately, they are such a low factor on your credit score and they fall of your report after 2 years.
What this means for credit cards
Applying for credit cards lower your score - Here is the yes part of the common question we get, "won't applying to credit cards hurt my credit score?" Yes, the answer is yes. However, being such a low factor, credit checks will usually only decrease your credit score by only a few points. And after a few months with on-time payments, larger available credit, lower utilization - which are all larger factors - your score will likely return to even go higher.
Credit inquires bunch up - Credit inquires that all happen in a span of around a week will generally be consolidated into "one" inquiry for your credit score. I don't know the exact science or length of time, but generally this is useful when applying to mortgage rather than credit cards. While every single hard inquiry will be recorded on your credit report, they don't look as bad when done all in a certain timeframe.
New Accounts are related - Not just hard inquires, but having new credit lines also can ding our credit score. So again, opening multiple credit cards in a short amount of time can seem like you're desperate to lenders. But also, again, with such a low factor on the credit score, this usually isn't a large problem.
From my own Capital One Credit Wise report. Despite a below average inquiry amount, as of 3/13/24, my credit score is above 800.
Available Credit (~5%)
Available Credit (~5%)
Excellent = $50K+
Associated with utilization and total balances, available credit just focuses on how much credit you have not used. Having low available credit can look like you're desperate for money to lenders.
What this means for credit cards
More cards, more available credit: As mentioned in the utilization section, the more credit cards you have the higher total credit will become available.
Banks have a limit of credit they will extend to you: The number is based on your income and other factors. So having credit cards in multiple banks can provide an even greater number of available credit.
FICO vs. Major Credit Bureaus
FICO vs. Major Credit Bureaus
A lot of banks will provide free credit score reports to you following the same standard and calculations as the three main credit bureaus. While they can be a good estimate, these reports from FICO, CreditWise, and more are NOT your real credit score. Usually they are somewhat inflated, giving users inflated optimism when getting a loan product. The large branded credit card companies like American Express, Chase, Capital one, and Citi usually pull from one or all three of the main credit bureaus for your score and not from any of those free companies mentioned. This doesn't really change any strategy, but just so you are aware.
Page updated
Google Sites
Report abuse