Does Opening a Credit Card Affect Your Credit Score?

You must have credit cards, loans and other accounts to build up your credit history. It's a delicate balance, because too little credit means lenders don't have enough information to judge your payment history and other factors. Too much means you might overextend yourself and default on your accounts. Credit applications can be positive or negative, depending on your overall financial picture.

Process

You must fill out an application to open a credit card. The bank will get a copy of your credit report and will assess your financial picture, including existing accounts, income, payment history and the overall length of time you've been using credit. This credit review is considered a "hard inquiry," which will show up on your credit report so other lenders know you recently submitted an application.

Effects

Your credit card application will affect your credit score in two ways. The hard inquiry will deduct up to five points, according to major credit score compiler Fair Isaac Corp., or FICO. It will bring your score down even more if you make several applications within two or three months.

The new credit card account will have a positive or negative impact, depending on your overall credit history. It will help you if you have a modest amount of available credit overall and are using it responsibly and making payments on time. It will hurt if you already have numerous credit cards with high credit limits that are completely maxed out, especially if you pay late or skip payments.

Benefits

The benefits of opening a new credit card often outweigh the credit score impact. For example, you might find an account with a much lower interest rate that will save you significant money in the long term if you transfer your existing balance. You might find a reward card that pays you back in cash, airline miles, or redeemable points whenever you use it. It makes sense to lose five points for savings or rewards.

Misconceptions

You might think it makes sense to close old credit card accounts when you open new ones and transfer your balances. The opposite is true, according to consumer advocate Clark Howard. Your score might be harmed by closing credit cards because you lose the good history built up on those accounts. Howard recommends putting them aside and making a small purchase twice a year to keep them active and in good standing. Pay them off as soon as you get the statements.

Warning

It is absolutely essential to open credit cards after a bankruptcy or severe financial problems that have destroyed your credit score. You cannot rebuild credit without proving you can use it responsibly. Banks close your accounts if you stop paying and your debts are discharged in a bankruptcy. It is hard to open a new card unless you work with a bank that specializes in high-risk borrowers, and you'll be hit with a high fees and exorbitant interest.

Secured credit cards are a lower cost alternative, according to Jeremy Simon of CreditCards.com, but you must guarantee them with a bank deposit equal to the credit line. The money can be seized by the bank if you don't pay your bill. Your credit score will go up if you build up an excellent payment history on your high-risk credit card or secured account, and you will soon be able to qualify for standard terms.