Credit Scores: Does Applying For Credit Cards Ruin Your Credit Score?

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One of the easiest ways to earn lots of miles and points is by applying for credit cards.  And with sign-up bonuses of 50,000 miles and points or more, per credit card, it is fairly easy to earn hundreds of thousands of miles and points in a year.

But folks are – quite rightly – concerned about the impact to their credit score.

The short answer is that in the short-term, your score could decrease, but in the long term your credit score could increase if you pay back your debt on time.

Why You Shouldn’t Sign-Up For Credit Cards

Interest rates on miles and points credit cards are very high, and you should NOT apply for miles and points credit cards unless you can pay off your balance in FULL each month.  You will never get ahead in life if you continuously pay 25% or more in interest on consumer debt.

You should also not apply for credit cards if you have trouble budgeting or find it hard to resist the temptation of charging unnecessary purchases to your credit card.

I also wouldn’t apply for miles and points credit cards with a score lower than 700.  It is much better to fix a lower score (by staying away from credit cards if need be) and apply for credit cards once your score is above 700.

Lastly, I personally wouldn’t apply for lots of credit cards in the 2 years leading up to a house loan since I want to do everything possible to get approved for a house loan at the lowest possible interest rate.  1 or 2 cards may be okay, but not 10 or 20.

What is a Credit Score?

In the US, a credit score is usually a three digit number which is used to predict the likelihood of you not paying back loans.  Fair Issac Corporation dominates the US credit score business and issues FICO scores which range from 300 to 850.

There are 3 main credit bureaus in the US – Equifax, TransUnion & Experian – and you usually have 1 credit score from each bureau.

Is a Higher Credit Score Better?

Yes, but only up to a limit!  A score of 650 is better than a score of 550, and a score of 750 will get you access to lower interest rates than a score of 650.

But after a score of ~760, you don’t necessarily get a lower interest rate for having a higher credit score.  So there is no real need, besides bragging rights, for having a higher credit score.

For example, if a retired person with a credit score of 830 applies for credit cards and finds her score has dropped to 790, she is no worse off because her credit score still gets access to the lowest interest interest rates.  Ramit Sethi of I Will Teach You to be Rich has a similar chart in his post on the importance of a good credit score.

How Is Your Credit Score Calculated?

According to the FICO website, your credit score is determined by:

  • 35% Payment History
  • 30% Amounts Owed
  • 15% Length of Credit History
  • 10% New Credit
  • 10% Types of Credit
Churning Credit Score

Fico Score Calculation (Image from MyFico.com)

The most important variable is your Payment History or whether you pay your debts back on time.  Since this is your credit score it makes sense to attach more importance to your history of paying back your debt!

The next most important variable are the Amounts Owed.  Having debt doesn’t, by itself, mean that you are a high-risk borrower.  However, if a high percentage of your available credit has been used (also known as having a high credit utilization), it may suggest that you are taking on more debt than is good for you and that you could not pay back your loans.

This is why it is very important to NOT max out our credit cards and to try to have a low utilization rate.  For example, if your credit limit is $10,000 don’t charge more than $1,000 to that card if you want a utilization rate of 10% or lower.

Impact of Applying for Credit CArds

If you apply for personal credit cards, the main decrease to your score is from the New Credit & Length of Credit History which account for 10% & 15% of your credit score.  But your score could improve because of the extra credit available to you (if you don’t max it out) which accounts for 30% of your credit score.

New Credit (10%) – Decrease.   However, each time you apply for a credit card, the banks look at your credit report (sometimes from more than 1 credit bureau).  This is called a “hard inquiry” and stays on your credit report for 2 years.  According to MyFico, in addition to impacting your credit score, lots of hard inquiries also suggest that you are a riskier borrower to banks.

But no one knows for sure the exact impact of credit inquires on your credit score, since the algorithm which calculates credit scores is a secret.  But folks speculate that an 18 month old inquiry has less impact to your credit score than an inquiry only 1 month old.  And it is for this reason that some folks like to apply for cards in 91 day intervals since they feel that the impact of recent credit inquiries is less after a 91 day period.

MyFico also lists as fallacy that “My score will drop if I apply for new credit.

Length of Credit History (15%) – Decrease.   Applying for a personal credit card will decrease the average age of your credit accounts, which will decrease your score.  But this has only a 15% impact to your credit score.  Note that business credit cards from certain banks do not sit on your personal credit report (unless you default) so applying for a business credit card doesn’t impact the Length of Credit History.

Amounts Owed (30%) – Increase.   In the long term, applying for credit cards could increase your credit score because you get more available credit which decreases the credit utilization ratio.  In other words, you are using even less of the total credit available to you (assuming your spending patterns remain about the same), so your credit score improves.  This is why some folks see an increase in their credit score a few months after applying for new cards.

Bottom Line

Applying for credit cards is an easy way to earn lots of miles and points to have Big Travel with Small Money.  But you should use credit responsibly and not pay high rates of interest.  Start slow and gauge the impact to your credit for yourself before applying for more cards.

And here’s a post on the impact of cancelling credit cards.

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54 responses to “Credit Scores: Does Applying For Credit Cards Ruin Your Credit Score?

  1. In my experience, more churning has actually increased my credit score by about 30 points in the long run. I hypothesize that the algorithm is picking up on the fact that I’m (1) handing more credit responsibly and (2) ulizing less available credit. I’m in my early 30’s, don’t have a mortgage, and have a sizable student loan. I’ve 12 inquiries for the last 12 months on my most recent report. I’ve been churning through sign-on bonuses on and off since 2007. I’ve noticed the credit score increase over the last year and a half.

  2. I’ve been reading that banks see how many credit card applications per address and that could hurt you. Do you know anything about that?

  3. Excellent post. Much needed info here.
    Can we have your insights about the impact of having business credit cards on annual taxes and immigration process? For people only authorized to work for a single employer, is it okay to apply/have a business cc? Would it raise any concerns with IRS or USCIS?

  4. Pingback: What effect does applying for credit cards have on your credit score? » weeks + miles

  5. “Lastly, I personally wouldn’t apply for lots of credit cards in the 2 years leading up to a house loan since I want to do everything possible to get approved for a house loan at the lowest possible interest rate. 1 or 2 cards may be okay, but not 10 or 20.”

    I’d really appreciate hearing from knowledgeable people as to the veracity of this claim. Aside from FICO credit score and income, are the number of recent inquiries really more of an issue for mortgages than other types of credit?

  6. I just one AOR in November 2012, applied for mortgage refinance in Jan 2013 and did another AOR during Jan 2013 while refinance application was being processed. Mortgage company asked for explanation for each credit inquiry. I simply stated that I applied for these credit cards to get free airline and hotel points for upcoming family get together. Mortgage company had no problem at all and approved the application and I closed on the refinance last week.

    • @Kay @ Travel Bug Diary blog – I’m in the same position as you, but with many more inquiries and cards, but my score has remained flat.

      @Lively – They are likely referring to ARS and US Bank issued cards which seem to track all inquiries to one address.

      @Musical Gal – Only you can decide that for yourself and ask your immigration attorney.

      @Patterns @Nit
      – Each financial institution has their own policy for approving loans and while folks certainly get approved for loans with many credit inquiries, I personally do not want to risk mucking up (even to a very small extent) the possibility of not getting a loan or a good interest rate on the MOST important purchase in my life. It is also impossible to predict when banks will be wary of extending loans as happened a few years ago. Yes, I realize that I’m leaving miles and points on the table, but a home purchase is more important to me.

  7. Recently I am wondering of the fast way to increase my credit score because it is still below 700. Do you think it will help if I apply a bestbuy credit card, buy an ipad, do financing, then pay off the price in 6 months? Somebody told me so, but I am wondering whether it will really improve my score much more than the one I will get if I pay off my credit cards for consecutive 6 months.

  8. @jesson ummm I doubt it would make much of a change. and if you are going to apply for a card, don’t apply for one as worthless as a crappy best buy card.

  9. @ Jesson – I think putting a small amount of purchases on your credit card and paying them off in full every month should accomplish the same thing as the Best Buy scheme.

  10. Even if you don’t apply for any new cards in the last 2 years before a mortgage, cards (even closed) stay on your credit report for 10 years – would banks care if they saw that you had dozens of cards?

  11. What about closing accounts? I started churning last year but haven’t gotten to the point where I need to close cards yet – but that day is approaching. I’ve gotten the hang of the “open and meet minimum spend” part of the game, but the “close and churn” is still an unknown for me.

    I’m not sure if I want to just blitz the Chase and Citi apps until I start getting declined, at which point I can call them up and change existing cards over (avoiding a closure and a line decrease, while keeping the length of credit line longer), OR just close the ones with annual fees coming due and apply for new ones.

    I read your post on when to close cards but it kind of glosses over the credit impact. Any thoughts?

  12. @Sal @Kay Thank you so much!

  13. How do I check my credit score??
    Thanks for this great post

  14. At some amount, I’m better off with more money and a lower credit score. If someone offers me $100,000 in exchange for taking 50 points off of my score for 2 years, I’ll gladly take it. Even if I take out a mortgage during that time, the money I got covers any additional interest by a large margin, and I can always refinance it later if it’s such a big deal.

    No one is offering $100,000 for that, but the point is that I’d even be willing to sustain some decreases for these juicy sign up bonuses. $500 or more at a time isn’t hard to justify. Then again, I’m not reliant upon a high credit score, so maybe it’s mostly because of my situation that I can do this.

  15. It’s been a bit frustrating for me. I’ve always had good/excellent credit, on-time payments and great utilization. However, ever since I began applying to credit cards (only have about 4 new ones in the past 11 months, oldest card is 5 years old) my credit has been going down all but two months in the past year. The only thing that could be affecting it really is the average age of accounts, but why does it *keep* going down even though I haven’t applied to a new one since last July? I did take out a car loan in August, could that be it? It’s still in the high-good range, but I really liked my excellent score.

    I know you’re not an expert of nuthin, but if you know anything…:)

  16. How does a mortgage and a car lease that is joint with husband and wife affect each person’s credit? Does the total amount of the mortgage and the total amount of the lease get equally divided between the two, or does it appear on the credit report as if each party is responsible for the amount of the full loans?

  17. Good Read. I would love to know what your research/opinion is about closing credit cards. Do the closed out cards also participate in calculation of average credit history? (So one would rather wait for 1 year to close it, than just 6 months?) Or do the closed out cards only remain in the average calculation for a certain period of time? (like how you mentioned that the hard pulls do not affect – or say, have a minimal effect, after 2 years.)

  18. To me, the troublesome/concern with cc churning is that (1) it’s harder to reconcile for all expenses, eg New Setup in Quicken and (2) more troublesome to setup new online accounts / setup auto-pay / remember to pay all the first bills on time to avoid late fee, which contributes to the 35% payment history record. For Citi, there’s 3 logins – 1 only for Hhonors, 1 for personal, 1 for business. That’s pretty inconvenient given they’re all the same issue bank. A good reminder post though! 🙂

  19. How does being an Authorized User affect your credit? I am on almost everyone of my wife’s cards as an AU (so 30+ cards combined).

    How do CC companies view people who pay down credit cards before the statement close date? I’ve been doing one (or more) mid statement payment(s) to get low balance at close date, but doesn’t seem to help much as my credit scores have been declining despite a slowdown in CC apps (only one or two in the last few months). Have ~7% credit utilization overall, but perhaps ~30% if I consider the intra-month charges.

    If you have $10K CL, how much to do you personally charge per month? I’ve been around 30%, so ~$3K charge and then paydown before the statement for low balance.

  20. I pretty much pay my bill either on-time or ahead of time and in full. That said, to monitor my credit score, I have both Credit Karma and Credit Sesame. What I dont understand, I have 845 in Credit Sesame while only 778 in Credit Karma. A big discrpency, IMO. Which one has the correct number and what do you think about this big different? Thanks

  21. As two others commented above, I would like to know when and how to close an account. Do I wait a year, do I just transfer to another card?
    Thanks for all comments and information.

  22. I thought credit card churn in one day only have one hard inquiry. But why my credit alter showed 3 credit bureaus got reported by banks for almost every new credit card open? Does that mean I’ve got multiple hard pull in one churn? Do you know anywhere I can monitor my credit score before and after applying a new account? Thanks.

  23. @Patterns,@Nit,@Daraius The good news is that banks are loosening up a bit and starting to bring back the pay option mortgages. There is nothing like negative amortization to ensure people can get into their dream homes, just to default shortly thereafter.

    It’s best to talk with a few mortgage brokers to directly get their input. The main metrics mortgage companies look at include debt-to-income ratios, mortgage loan(principal + interest payment)-to-gross income(monthly) ratio, payment history, credit score and bank account balances for previous 3 months.

    Here’s where you could run into problems. You have a 740 credit score and decide to do an app run. Well if your score takes a slight hit to 730 or 735, then you may no longer qualify for the lowest rates, which will cost significantly more than getting a bunch of free miles and points. Worse yet is if your score is near 660 and then it drops because you are likely to get thrown to the wolves.

    @Patterns you might take a look at “the mortgage professor” (just bing it) if you need to get your feet wet on the mortgage process and how to shop for loans.

    @cow use the same username and keep adding the same number. simplifies the Citi a little bit.

  24. @Vansh Before you close a card, move the credit to a card that doesn’t have an annual fee. That will allow you to 1)maintain the length of credit history as well as 2)keep a lower credit utilization ratio.

    Achieving a high (over 760 score) takes time, effort, and being responsible and those characteristics make up 80% of the score. This “game” isn’t for everyone, but if your in financial state where you don’t need your credit, I say take full advantage of points and miles every 91 days!!

  25. Dear Darious,

    You said your wife got 3 Barclays card in her last churn. How many hard pulls on her transunion report for these applications? Thanks!

    • @Bob Roberts @Vansh @Yvonne – I’ll post an update on closing cards.

      @Matt – You can sign up for your official score through myfico, or get a free proxy score using credit karma or credit sesame.

      @Carrie – I’d review your credit score to see that that there isn’t any unexpected suprise there and make sure to not max out or have a high utilization ratio. Also check creditboards.com for more info.

      @Char – I’d check creditboards.com

      @Paul – Being an authorized user can help you if the person who’s account you’re on manages credit well or hurt you if not. I’d check creditboards.com for more info.

      @Tiara – They are each approximating your score from a different credit bureau, and none of them are your “true” credit score which is available from myfico.

      @Christina – I haven’t checked as yet, but will post an update.

  26. Any idea how a future car loan would be affected by card apps ? If my FICO is 785, would 2 or 3 hard pulls within 6 months of a loan impact the interest rate I get ??

  27. Hi, Daraius

    I just applied the SPG card and felt really happy that it was approved. However, the sad and very surprising thing is AMEX only gave me 1000$ CL, which is the lowest one that I have ever got since my first credit card. As I need to spend 5K in 6 months. If I spend 900 $ , pay off it, spend 500 $ and pay off all the debt every month to keep 0 balance. Will this activity on my account affect my credit score?

    Thank you very much!

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  29. I used the 2 browser trick for Citi HHonors Visa (free version) last October, and after getting bonus points and hitting spend, I basically stopped using both of them. Earlier this month, I cancelled 1 of them because there was no activity for about 4 months. I had very little history on this card. My sister said I made a mistake by cancelling it and said that I should keep all free (no annual fee) cards in the drawer. What are your thoughts on this?

    • @Jesson – I’d pay off the card as soon as possible to minimize the impact of a high utilization ratio.

      @Dave – It doesn’t hurt to keep an annual fee card forever, but cancelling one card could make sense if you plan on applying for more Citi cards later on. But I would keep a few fee-free cards for a long time to help your credit report age.

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  35. I just checked creditkarma and my credit score went down 42 points to 739. I don’t think there were any transunion pulls in the past couple years. I did add 2 chase cc (pulled from equifax), and my credit history went down from 45 months to 43 months. Still 42 points seems drastic. Any thoughts?

    Also, do you know how AU effects credit age? I’m thinking it would be an idea to become an AU on my fathers old cc. I saw once on my equifax credit report a card (chase BP) opened in 1994 when I was 11. I realized that they were counting the original account opening, though I only became an AU some 10 years later. The implication was that they were counting the original date for credit age, though I don’t know for certain.

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  47. Can you explain how staying away from credit cards can help fix a lower score? Aside from the short term impact of the hard pulls, how could having new cc’s negatively affect my score?

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