You’ve probably experienced that moment when you’re in the checkout line at the store and the cashier asks if you’d like to save 15% and open a credit line. While saving that percentage on your purchase may be appealing, the very act of opening a new credit card can hit your credit score.
The gold standard when it comes to credit scores is the Fair Isaac Corporation model, better known as the FICO score. When you open a new card, there are a variety of factors that come into play that determine how harmful, or in some cases, helpful, to your credit it will be.
Average Age of Accounts: Depending on how long you’ve been building credit, opening a new credit card can cause your average age of accounts to drop. The number of years you’ve been building credit with lenders builds your credit score, as long as you’ve paid on time and consistently. The fewer lines of credit you have, the more your average age will lower.
Debt-to-Credit: Roughly 30% of a person’s credit score is impacted by how much debt there is compared to how much credit a person has available. So, if the percentage of credit you have is significantly higher than your debt, opening another credit line can positively affect a credit score. On the flip side, if your spending sends your debt spinning out of control into the unhealthy debt-to-credit spectrum, you’re doing yourself a disservice.
Inquiries: When a person attempts to open a new line of credit, the lender requests a credit report on the borrower, which stays on a credit report for two years. Inquiries that have a negative credit risk can have an impact on your score. And the more inquiries made on your card in a short period of time, the harder your score will get hit, ultimately leading to a higher interest rate.
While opening a new credit card can help someone with little to no credit begin building it, and also help those who maintain their debt consistently raise their scores, there are factors to take into account when opening a new card. The bottom line is if you open a new card and put more on it than you can afford monthly, your credit score will drop, and the best course of action next time a retailer asks you if you’d like to open a new card, or a credit card offer in the mail claims you’ve been pre-approved, is ‘no thanks.’
Reach out to CCCS of Chattanooga if you need credit card help or want to learn more about credit counseling.