In the short-term, applying for a new credit card and getting a new account may have negative effects on your credit score. Opening multiple new accounts at once can be especially damaging. In the long run, though, more available credit can have positive effects on your score by improving your debt-to-limit ratio.
To better understand the net effects of getting a new credit card, first consider the common criteria used to compute your FICO score. Developed by the Fair Isaac Corporation, the FICO scoring model has many criteria divided among five major categories: payment history, amounts owed, length of credit history, new credit and types of credit. Payment history and amounts owed have the most influence on your score, with 35 percent and 30 percent, respectively. Length of credit has a 15 percent weight. New credit and types of credit are 10 percent each. This standard scoring system is the foundation for modified rating systems used by Equifax, Experian and TransUnion, the three major credit reporting bureaus.
Applying and Opening Account
When you apply for and open new credit card accounts, you affect the new credit and types of credit categories of your score. Each new credit inquiry can knock your score down a few points. Additionally, if you try to open an account really close to a previous inquiry, this can have negative effects. Another consideration is how many credit card accounts you already have open. Some scores take into account the number of similar credit accounts you have open.
One of the single most important factors in your credit score is your debt-to-limit ratio. This shows how much of your available credit is being used. This ratio covers much of the amounts owed section. When you have a new card, you reduce your overall debt-to-limit ratio, plus you add a card with a zero percent utilization. Generally, single accounts and overall ratios below 30 percent are favorable. Anything over 70 percent can cause negative score effects.
A final note of importance is that the real impact of having another credit card depends on your use of it. Adding a new card when you have two or three maxed out may temporarily improve your debt-to-limit ratio. However, if you apply the same irresponsible spending behavior to your new card, your credit score and financial position both take a hit.
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