If you are unhappy with your current credit card, haven’t had a credit card in a while, or you’d just like to expand your potential lines of credit, then you’ve probably thought about opening a new credit card account. However, the question of whether or not you should get another credit card is a complicated one, with no easy answers on either side. In order to make this decision, you need to be aware of the advantages and disadvantages of opening a credit card beyond the cards that you already have.
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Does Opening a Credit Card Account Hurt Your Credit Score?
One of the main disadvantages of opening a new credit card is how it hurts — at least temporarily — your FICO credit score. There are three main ways this happens:
Credit Inquiry
Whenever you apply for a line of credit, the provider will perform a credit inquiry. This is just a request for information from the credit reporting bureaus about your credit history including any missed payments, how much debt you’ve taken on and repaid in the past, and other relevant information that helps the provider to assess your risk as a borrower.
Unfortunately, too many inquiries can actually hurt your credit score, even if you don’t get approved for the credit card. So if you do decide to open a new credit card, make sure that you’ve narrowed down your list of preferred cards and that you only apply when you are confident that your application will be accepted. This will save your credit score from being hurt by too many inquiries.
Average Age of Credit
The age of your credit makes up 15 percent of your credit score, and credit age can be broken down into two categories. The first is the age of your oldest active account; the older the better. The second is the average age of all of your accounts. So when you open a credit card, you are automatically decreasing the average age of your credit, which will have an unavoidable, albeit smaller, negative impact on your credit score.
Credit Utilization
Finally, opening a new credit card can actually hurt your credit utilization, if you’re making a large purchase at the same time or opening the new card explicitly to afford some more expensive item or service. Credit utilization is the ratio of the total balances on all of your accounts to the total credit limit. A low percentage is good for your credit score, while a high utilization ratio is bad. Since credit utilization makes up 30 percent of your credit score, it’s especially important to show some restraint with your new card. In fact, many credit card companies offer deals like points bonuses and low APR for new credit cards specifically to incentivize consumers to do more spending. This helps the credit card companies make more money from vendors, but it hurts your credit score if your spending gets out of hand.
Other Considerations Before Opening Up a Credit Card Account
Opening a new credit card can hurt your credit score, but the negative effects can be mitigated to some extent by limiting the number of credit inquiries on your credit report, keeping your older credit card accounts, and watching your spending across all of your credit cards. Before you you make the decision to open the new card, though, make sure to keep the following things in mind:
Getting a Credit Card PIN
If your reasons for getting a new credit card are security-related, it might be a good idea to talk to your current credit card provider first. They can add PIN security to your current credit card, allowing you to hang on to an older credit card while avoiding opening a new account, both of which will help your credit score.
Changing Your Name
Whether you’re changing your name because you just got married, underwent a gender transition, or for any other reason, you don’t need to get a new credit card just to have one that displays your new name. Contact your current credit card provider to inform them of your name change and they will provide you with a new card that reflects your new name. Make sure that you contact the credit bureaus as well so that your name on your credit report is changed as well.
Taking Advantage of Bonus Points or No-Interest Periods
Many credit card companies will offer a period of low interest or additional rewards for new customers. It can be tempting to leap on these offers and try to maximize the sign-on bonuses for a net gain. When done in large quantities, this practice is known as credit card churning. Churning involves frequently opening new credit card accounts, taking maximum advantage of the bonuses to earn excessive awards for the duration of the incentive period, and then repeating the process with other cards.
As we discussed above, the average age of your credit cards and the number of hard inquiries on your credit report will both affect your credit score. If you do decide to churn credit cards, make sure that you’re ready for the subsequent hit to your credit score.
If you’re only interested in just one or two new cards for the sign-on bonuses, then make sure that you’re prepared to meet the requirements to receive those bonuses. Many cards will require you to spend a certain amount in order to get the full bonus, but if you spend outside of your means, you could send yourself into bankruptcy.
Getting Better Rewards Without Opening a New Credit Card
It’s also worth noting that you don’t necessarily need to open up a new card in order to get better rewards or lower interest rates. If you’ve had your current card for a while and you have a strong history of on-time payments, then you may be able to negotiate with your credit card company for new terms on your existing card. This can allow you to reap the benefits of better credit card terms without taking the hit to your credit score that comes with opening a new credit card account.
At the end of the day, it’s up to you to decide if opening a new credit card account is worth it. You can expect your credit to take a hit if you open a new account, but there are ways to keep your credit score from being hurt too badly. You should also think carefully about why you want a new credit card and consider whether or not it would be possible to achieve those goals, even if it’s simply by working with your current credit card company to change the terms or the information on your card.
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