Does a New Credit Card Hurt One's Credit Score?

[Tortoise]

Does applying for a new credit card tend to hurt one's credit score?

Most of what I see on the Internet seems like hearsay, because the algorithms that the credit reporting agencies use to determine credit scores are proprietary and not shared with the general public.

I almost always keep the monthly balance on the card below 25% of the limit. The only reason I want to apply for a new credit card is because I have grown to really dislike the big bank that my existing credit card is with. I would rather not send another dime to that bank. But it's the only credit card I have, so if I want to keep using a credit card I'll need to open a new one somewhere else.

So would I be dinging my credit score by getting a new card, or does it depend on what type of card I apply for (for example, pre-approved vs. non-pre-approved)?

[Pointedstick]

It hurts your score in two ways:

1. Applying for one causes a "hard" credit inquiry, more of which are bad for your score.
2. It opens a new account with an age of zero days, lowering the average age of all your accounts. A longer average age is better for your score.

But is also helps your score by adding a new account. Your score likes more open credit accounts.

[dualstow]

Perhaps you can eventually improve your score by getting your credit card limit raised.

I just found out my score over the summer when I applied for a home equity loan. I think it's only the second time in my life I've ever seen it.

[nwagers]

If you're unhappy with your bank I would change. Most of the impacts on your score are very short-term. The only exception I can see is if the previous account was open for a very long time. I believe the FICO scoring model accounts for the average duration of all open credit accounts.

If you leave the old account open, it will help you. It increases your total available credit (decreasing your utilization ratio) and keeps the average age of the accounts higher than if you were to close it. You can read up on FAQs at the MyFICO website, straight from the horse's mouth. You can also sign up for a free trial and get access to a score simulator. It will estimate the impact of opening a new account.

In all, you're probably talking about <20 point change that will be mostly transient. It's unlikely to put you in a different category for any major financing. Leverage your score when you need it, but don't let it dictate your actions .

[SteveGo]

Tortoise,

Do you have some sort agreement with your bank that ties your credit card that requires you to keep a deposit account open as well? I haven't heard of such a thing before.

I have personal checking accounts with Schwab Bank, plus a local bank that ranks very well in the bank safety ratings. Neither one of the offer any credit cards, though. (Schwab did at one time, but they quit.)

I think the other posters are correct in that any hit to your credit rating would be short term. I would also double check to make sure about keeping your current card if you switch banks. Why would any bank want to give up that revenue stream?

[Libertarian666]

Yes, there is a hit to credit score for new hard ("voluntary") inquiries, but it isn't that big and will go away at some point in the future. It also depends on how many you already have; going from 1 to 2 or from 3 to 4 doesn't make a significant difference IIRC.

I wouldn't worry about it.

[ns2]

I'm not familiar with the proprietary FICO models but I wrote some credit scoring software once, and yes, applying for a credit card does lower your score. Actually, it lowers your score any time there is an inquiry against your credit file by a lender because they simply assume that you applied for credit and that's why they are checking. The one time you want to avoid applying for any credit is if you are about to apply for a mortgage. Other than that it doesn't matter all that much because they are usually only interested in your recent history of inquiries and these things eventually age off. As I recall it the model I wrote used values like inquiries in past 30,60,90 days but I don't recall anything used beyond that range.

[ns2]

I applied for a car loan a few years back through the dealer. They did me  a 'favor' and applied to 6 different lenders [wtf? you couldn't check the rates before applying?] to get me the best rate. My almost perfect FICO score of around 790 took a near 100 point hit, and it took 2 years for those inquiries to drop off and my score be restored to its previous level.

Good reason to arrange your own financing before buying a car. Like I said, I don't know anything about the FICO model but I do know they just look at the cold, hard facts as they see them on your credit report and compare this to known patterns that indicate credit-worthiness.

Interestingly, the company I was writing models for was very interested in the number of recent inquiries because they were data-mining for people who were likely to accept their credit card offer with a > 25% interest rate. People with a lot of inquiries fit the profile well.

[ns2]

I took the minimum  loan amount required to get the rebate, and then paid it off 2 days after I made the first monthly payment.

How do you know this wasn't the reason your credit score went down as opposed to those 6 inquiries?

I'll say it once again that I don't know anything about the FICO model, but it may very well be the reason for the drop in your credit score. You cost somebody a lot of money in projected interest payments they may have already recorded on their books.

[Tortoise]

Thanks for the pointers, everyone. I'll read the FAQ at the MyFICO website when I have a bit more time. It's good to hear that any ding to my credit score from applying for a new credit card is likely to be relatively small and short-term.

Do you have some sort agreement with your bank that ties your credit card that requires you to keep a deposit account open as well? I haven't heard of such a thing before.

No, I closed my deposit account with that bank many years ago (they were nickel-and-diming me), but kept the credit card since I didn't want to ding my credit score by getting rid of it. But I recently went on a vacation out of the country and came back to find a bunch of unexpected 3% foreign transaction fees on my credit card statement.

3% is within the normal range for big banks, but I just don't like it. It was the straw that broke the camel's back. I'm sick of that bank nickel-and-diming me, even through my credit card. I can get a credit card through another institution that charges only 1% on foreign transactions.

I would also double check to make sure about keeping your current card if you switch banks. Why would any bank want to give up that revenue stream?

Yes, I will keep my existing credit card. I'll just hardly ever use it--for example, maybe once a year on a small purchase to keep the account active, as MangoMan suggested.

[ns2]

Because at Credit Karma, you not only get free scores, but an analysis of what is affecting it. The hard pulls did the job. The paid off account with open credit actually helped my score.

As has been said before in this thread the FICO score algorithms are proprietary so unless the wizards at Credit Karma have insider knowledge I wouldn't put a lot of stock in it.