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Does Applying for a Credit Card Affect Your Credit Score?
Many factors affect your credit score, both positively and negatively. Credit utilization, or the percentage of available credit you're using, is one factor. Payment history, collection actions, and bankruptcies are other major considerations for the three major credit bureaus, which perform these creditworthiness calculations.
But did you know that making a credit card application can cause a drop in credit score? And that could impact your ability to obtain other types of credit, such as a mortgage or car loan?
In this article, we'll explain how and why your creditworthiness rating could change because of a credit card application and how best to navigate the process to avoid impacting your long-term financial history.
How applying for a credit card affects your credit score
When you apply for any type of credit, the potential lender or credit card issuer is first going to review your credit history to determine your creditworthiness. Your credit history is documented in credit reports that are kept up to date by the three major credit bureaus, TransUnion, Experian and Equifax.
Each has its own credit scoring formula, but generally the credit score range is 300 (poor) to 850 (exceptional).
When a lender reviews your credit report, it's called a credit inquiry. And there are two types of credit inquiries: a soft inquiry (or "soft pull") and a hard inquiry (or "hard pull"). The type of inquiry determines the potential credit score impact.
Soft inquiry
A soft inquiry is when a potential lender or card issuer reviews your credit report and credit score to understand how well you're managing your credit. A soft inquiry also takes place when you check your own credit report. (Credit monitoring is something you should consider doing on a regular basis. Free annual credit reports can be ordered from AnnualCreditReport.com.)
A soft inquiry may appear on your credit report but doesn't cause a drop in credit score.
Hard inquiry
A hard inquiry occurs when you make a credit card application or apply for any new line of credit. The credit card issuer is making a serious creditworthiness evaluation to determine whether to approve a loan application.
Hard inquiries also show up on your credit report, and these are the ones that can ding your credit score. One hard inquiry might reduce your credit score by five points or even more. Repeated hard inquiries within a certain amount of time could cause your score to drop by 10 points.
Soft inquiries when applying for a new credit card
Banks and credit card issuers will usually perform a soft inquiry to get a basic idea of whether you're likely to be approved for a new credit card. This surface-level creditworthiness assessment can take the form of a pre-approval or a pre-qualification, depending on who is initiating the action.
Credit card pre-approval
"You're pre-approved!" If you have a good credit score (good job!), you might receive offers in the mail or via email saying you're pre-approved for a credit card. This means the card issuer or bank has peeked at your credit report (a soft inquiry) and determined that you are creditworthy—in other words, the lender feels assured that you are a good risk. This soft inquiry doesn't affect a credit score.
Credit card pre-qualification
It's typically the consumer who initiates the pre-qualification process. Most major credit card issuers allow you to submit pre-qualification forms on their websites that ask for your name, address, and the last four digits of your Social Security number. The issuer can use this information to perform a soft inquiry of your credit history and check if you qualify for a card. Again, no credit score impact.
Pre-approval and pre-qualification tip the odds in your favor that you'll be able to get that credit card, but they are not a guarantee of credit card approval. If you are pre-approved or pre-qualified, you can still be denied a credit card after a card issuer dives more deeply into your credit history (a hard inquiry, in other words) and takes into consideration your employment status, rent or mortgage payment, and income.
Here's the bottom line: a soft inquiry doesn't impact your credit score, but it's not a promise of approval.
Hard inquiries when applying for a credit card
Hard inquiries are where the rubber meets the road, financially speaking. You've made an official application, and now the bank has to do its due diligence to be assured that you're going to be a responsible cardholder by being on time with monthly payments, avoiding credit card fees, and staying within your credit limit.
Hard pull of credit file
A hard pull, or hard inquiry, indicates that a potential lender is seriously looking at your creditworthiness factors. No one can perform a hard inquiry without your consent. If you are notified that a hard inquiry has been requested and you didn't already know about it, you can dispute it with the credit bureau.
Financial institution requests to review credit file to determine risk
Underwriting is the process of your lender verifying your income, assets, debt, credit and property details to issue final approval on your credit card application. Lenders refer to the 5 C's of lending: Character, Conditions, Capital, Capacity and Collateral. Character may refer to your payment history; conditions to your employment status; capital to your income and assets; and capacity to your credit utilization ratio. When it comes to credit card approvals, all of these could come into play.
Hard inquiries show on credit report for two years
There's one more important fact to know about hard inquiries: They stick around.
Hard inquiries on your credit report last for two years, although they typically only affect your credit score for one year. They serve as a timeline for when you have applied for new credit. So, for example, a lender can see if you're shopping for a mortgage or a car loan. They can also see if you've been repeatedly denied a new credit card, and that may affect their creditworthiness determination.
Tips for avoiding hard inquiries on your credit report
Can you avoid hard pulls on your credit report? Probably not. They're a fact of life if you want a credit card, a car loan, a mortgage or a line of credit.
But there are things you can do to minimize the number of hard inquiries, thereby limiting the impact on your credit score.
Know your credit history
Knowing your credit history means seeing yourself as others see you. As mentioned earlier, you should regularly review your credit reports because the credit bureaus do sometimes make mistakes. It's important to get these corrected. Reporting inaccuracies to one credit bureau typically fixes the problem with the other two.
Get pre-approval or pre-qualification
Remember: pre-approvals and pre-qualifications are soft pulls. They may appear on your credit report, but they won't put a dent in your credit score or count against you in your creditworthiness criteria.
Research credit cards that align with your credit history
If your credit score is not good (say in the 500s), look for credit cards that you qualify for. That will reduce the number of hard inquiries made when you apply for premium cards that you have little chance of receiving. The card you obtain might have a lower credit limit and charge a higher interest rate, but handling credit responsibly now will boost your credit score down the road.
Benefits of opening a new credit card
Even though hard pulls temporarily hurt your credit score, opening a new credit card can ultimately raise it. Here's how:
Your available credit increases
Lenders like to see about a 30% credit utilization rate. Opening a new card and creating a new line of credit (as long as you don't spend it immediately) can show you have a lot more credit than you're actually using.
Your credit mix improves
Credit scores award points for showing you can manage more than one kind of debt. If you have an installment loan for a major home repair, but don't have an existing credit card, successfully managing a credit card can help your credit score.
But if you already have several credit cards, one more isn't likely to help much, if at all.
You build stronger credit
Credit cards are a great way to build up a strong credit history, simply by making your payments on time every month. Some cards, such as the TD Cash Secured Credit Card, are designed for the very purpose of building credit.
Enjoy new card bonuses and offers
Opening a new credit card may give you bonus points/miles, a statement credit, a higher cash-back percentage and other perks. Shop for the cards that will give you the best rewards for your lifestyle needs.