Credit Card FAQ
Does Applying for a Credit Card Affect my Credit?
Every credit application — whether for a credit card or mortgage or car loan — is reported to the credit bureaus as an inquiry. When an application is processed by a creditor, he or she pulls your credit report in order to check your credit history.
The idea being that credit is generally approved with good terms for people with good credit scores and low risk — for those who have a bad credit rating and therefore are high risk, credit may be given but the terms will be steeper in terms of interest rates and late fees and such.
All About Credit Inquiries
Whenever anybody sends in a credit application, an entry is made in their credit report as a "hard inquiry." What this essentially means is that a creditor has pulled the person's credit report to check their credit history — which makes it a hard inquiry. A "soft inquiry" on the other hand is when credit card companies want information from the credit bureaus to send out the pre-screened offers to potential clients.
A hard inquiry can affect your credit rating. In fact, anything relating to finances generally affects your credit rating. As to how much a hard inquiry affects the credit score depends on a number of factors including how long your credit history has been established, how much is your credit score and your payment history.
The Effects Of Credit Inquiries On Credit Reports
A good rule of thumb is that with every inquiry, your credit score will come down a little bit. To define how much is a little bit there are several factors that must be taken into consideration. According to the Fair Isaac Corporation (FICO), about 10% of your score is affected by the amount of credit applications or inquiries made in the past few months. For every hard inquiry take 5 points off of your credit score and if your credit history is short or if there are several credit inquiries within a short span, then the impact may be larger.
How Much Time Between Inquiries?
A credit inquiry remains on your credit report for approximately two years. This means that when you apply for credit, there is a chance that every creditor will see how many times you have applied for credit in the past two years, and what your payment history has been. It is true that if the inquiry was made a long time ago, the impact of it on your score will be considerably less than any recent inquiry.
It is also true that if you want to apply for a mortgage or car loan, applying for four to five such loans within a period of a week, will be treated as a single inquiry when it comes to your credit scoring. But this does not work with credit card inquiries. Every credit card inquiry is treated as a separate inquiry and too many of them in a short period can be quite harmful to your credit score. Give yourself at least six to eight months between credit card applications at the minimum.
Misconceptions and Benefits Of Applying For New Credit
Checking your own credit score does not affect it. Soft inquiries (other lenders seeking information about you) will not affect your credit score as long as you have not initiated the credit application or inquiry. Applying for new credit card can be a positive thing even though it may take down your credit score by a few points.
If you have relatively new or limited credit history, and you have a single credit card which you have managed wisely, establishing new credit will eventually lead to a higher credit rating. Payment history accounts for 35% of your credit score. When it comes to credit — the important thing is to use it responsibly and your credit score will be just fine.
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