Offers involving low interest rates and balance transfers may leave you poised to cut up your credit card and replace it with a new one. Credit events, including applications for new cards, have an impact on your credit score. However, credit score calculations are complex. Depending on your situation, your new card could help or hurt your credit score.
Your credit score drops by a few points whenever you turn in a credit card application. Credit bureaus are wary of applications because people often need money when they're having a tough time making ends meet. About 10 percent of your overall credit score is based on your credit applications and your new accounts. New accounts like credit inquiries initially cause your score to drop, but your score should recover within a few months as long as you pay your debts on time.
Credit score calculations are partly based on your average length of account history. Credit bureaus reward stability with high scores, while people who constantly open and close accounts receive lower scores. The fewer accounts you have, the more impact your new card will have on your average length of account history. If you have one 10-year-old card, then your new card will drop your average account history to five years. If you have half a dozen 10-year-old accounts, then one new card will do less damage to this portion of your score.
Credit cards are known as revolving debts because you can borrow the same sum of money multiple times. Your credit score suffers if you consistently keep high balances on your credit cards because the bureaus view that as a sign that you're living beyond your means. If you open a new credit card, your access to credit increases, so your overall credit utilization decreases. However, your overall credit utilization remains the same or even increases if you close your old cards when you get your new one.
Your payment history has more of an impact on your credit score than any other single factor. If you're having a tough time making payments on your existing card then, your score may improve if you replace it with a lower-rate card on which you can actually afford to make the payments. Lower rates also mean you can pay down your balances faster, which means your score rises as your credit utilization rate drops.
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