Does Applying for a Credit Card Hurt My Credit?

Your credit score is used by lenders when they are determining whether to issue you credit. The most widely used score is the FICO score, which is calculated using the scoring algorithm developed by the Fair Isaac Corporation. Your credit score is based on your past debt management and attempts to predict how likely you are to default on a future debt obligation.

Function

When you apply for credit, most lenders want to check your credit score before deciding to offer you credit or not. As part of the application, you are usually required to give permission for the lender to pull your credit score. When a creditor does, an inquiry is noted on your credit report. The inquiry records who pulls your credit score and the date the score was pulled.

Effects

Each inquiry from an application for new credit on your credit report will decrease your credit score slightly because people who apply for more credit are typically at a higher risk of defaulting. According to the Fair Isaac Corporation, the amount of credit you have applied for recently makes up about 10 percent of your score. Each inquiry typically takes off about five points from your credit score, though the impact will be greater if you have a shorter credit history or several credit inquiries in a short period of time. There is no impact from inquiries made by employers, landlords or insurers.

Time Frame

Each credit inquiry remains on your credit score for two years. The further in the past an inquiry occurred, the lower the impact on your score. If you are applying for a mortgage, car loan or student loan, your score will be unaffected by inquiries for loans of that type in the past 30 days. For example, if you apply for a car loan and you had applied for two others last week, those other two inquiries will not affect your score. In the future, the scoring model treats all mortgages applied for in short period of time as only one inquiry and does same for car loans. For example, if you apply for five car loans in a week, even though all five will appear on your credit report, for the purposes of calculating your credit score, the scoring algorithm treats them as one inquiry.

Misconceptions

You can check your own credit score whenever you want without it affecting your credit score. In addition, if your credit report is checked without you initiating the check through an application, the inquiry will not appear on your report or affect your score when your score is pulled by other lenders. For example, if a credit card company pulls your credit score to pre-approve you for a card, the credit inquiry will not affect your score.

Benefits

Applying for new credit can sometimes help you improve your credit in the long run. If you have a limited credit history, though it may dock your score a few points to apply for a first or second credit card or loan, if you manage that source of credit responsibly, the overall effect will be to improve your credit score. Payment history counts for 35 percent of your credit score and inquiries only last for two years on your credit report so in the long run, using the credit responsibly is more important for maintaining a high credit score.