How Opening New Credit Cards Affects Your Credit Score
Whenever I mention that signing up for new credit cards to get account opening bonuses is a great way to make extra money and get frequent flyer miles and gift cards, I find that people are concerned about the impact this will have on their credit score. If you currently have excellent or very good credit, unless you are planning to finance a major purchase like a house or a car within the next six months, you will probably not see any meaningful ramifications from taking advantage of multiple offers.If your credit score is marginally good or poor, however, the slight dings to your credit score that will result from opening new accounts might be enough to cause problems for you should you need to fill out a rental application, apply for a job, or do anything else where your credit score is important. Of course, if you are already having trouble with credit or have in the recent past, it is probably in your best interest to limit your temptations and not open any more cards.
There is a way to get around worrying about any of this, though. To open new credit cards without seeing any impact on your credit score, only apply for business credit cards. Did you know that anyone can apply for a business credit card? Where the application asks for your business name, put your name down. When it asks for the business type, check sole proprietorship. When it asks for your tax ID number, use your social security number. The credit card companies do not seem to care whether you actually operate a business or not; they just want more customers. Business cards often have annual fees, though, so pay attention to the card's terms before signing up.
Opening more personal credit cards does affect your credit rating, but it can have both negative and positive impacts. The more available credit you have and the less you've used of it, the higher your credit score. Having $10,000 of available credit but only using $1,000 of it at any given time gives you a credit-to-debt ratio of 10%, while having a card with a $1,000 limit which you routinely max out gives you a 100% credit-to-debt ratio. If you can open new cards without spending much on them, having more accounts can actually improve your credit score slightly.
The average ages of your accounts is another factor in determining your credit score, so adding new accounts can lower of your score. However, you can always close the new cards when you're done getting the bonus, and the average age of your accounts will go back to what it was before.
Also, your credit score gets dinged every time a lender does what is called a hard credit pull, meaning that they inquire about your credit in such a way that it shows up on your credit report. Lenders often do hard credit pulls when you apply for a new credit card, and this will show up regardless of whether you get approved for the card. These pulls affect your score for about six months.
There are a couple of online tools you can use to see how different factors affect your credit score. Bankrate's FICO score calculator will ask you a series of questions, then estimate the range that your credit score is likely to fall in. By seeing the types of questions they ask, you can get and idea of what factors affect your credit score. Also, while I have not used Credit karma myself, if you want to monitor the impact of opening new accounts on your credit score, you can use their free daily credit monitoring service. My Money Blog has written a post on credit karma and can also tell you five ways to get a free credit score.
To learn about the credit card opening bonuses available, see Five Cent Nickel's post on $1200 Worth of Deals.
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Photo by ChicagoEye
| Credit Card Interest Repayment Calculator - enter in information for your current credit cards and a pay-off schedule will be calculated for you. | Credit Balance Transfer Calculator - input your current credit card details (balance and interest rate) and the details of a card you're looking to transfer to, and calculate your potential savings. |
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