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Does Opening a New Credit Card Hurt Your Credit Score? - YouTube
Channel: The Motley Fool
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your credit score can be something that
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makes things either very easy or very
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difficult for you that's why so many
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people try to study up on how their
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credit score is calculated and how the
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money moves they make could affect their
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score
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I'm Cyril Dwayne and in this video from
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the isense money lab we'll take a look
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at exactly what happens the important
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factors in your credit score when you
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apply for a new credit card just opening
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a new credit card hurt your credit score
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if you've done some homework on credit
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scores then you know one of the FICO
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score factors is new credit which
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accounts for 10% of your score another
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15 percent comes from length of credit
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history including the age of your newest
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account so together opening a new credit
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card would have a negative effect on
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factors that account for 25% of your
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FICO score let's walk through the
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process of getting a new credit card to
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illustrate how this all works the first
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step of bank takes when you apply for a
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new credit card is to make a hard credit
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inquiry which means it takes a look at
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your credit report a hard inquiry will
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negatively affect the new credit factor
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of your FICO score but the impact will
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be small if you only have one or two
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credit inquiries on your report within
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the past 12 months after all it's okay
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to apply for a couple of credit cards
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per year but if you're applying for
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dozens of them lenders may think you're
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irresponsible desperate for credit or
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both if the bank approves your credit
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card application you'll see the account
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show up the next time you check your
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credit report this also negatively
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impacts the new credit factor
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FICO will ding your score based on how
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long it's been since you opened a new
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account and how many new accounts you
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have side note FICO is unclear on what
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it considers a new account on top of all
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that a new credit card will negatively
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impact the length of credit history
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factor of your credit score your length
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of credit history considers the age of
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your oldest account the age of your
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newest account and the average age of
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all accounts the older the better
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opening a new card will reduce the age
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of your lowest account and your average
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account age thereby lowering your credit
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score but this miss is the big picture
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based on all that you might think
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opening a new credit card is a bad idea
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the important thing to remember is that
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the two most important factors in your
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credit score are your payment history
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and your credit utilization ratio or the
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percentage of your available
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that you're currently using combined
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they account for 65% of your credit
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score and a new credit card could help
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improve your credit utilization which
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accounts for 30% of your FICO score
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applying for a new credit card shouldn't
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have any impact on your payment history
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because you should be making your
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payments on time and in full every month
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on the other hand a new card could have
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a major positive impact on your credit
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utilization ratio this ratio is simply
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your total outstanding credit card debt
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divided by your total available credit
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the lower the ratio the better as an
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example let's say you only have one
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credit card with a limit of $10,000 and
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a balance of $2,000 your credit
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utilization ratio is 20% but if you
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apply for a new card and get approved
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for an additional $10,000 credit line
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your credit utilization ratio will drop
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to 10% in other words assuming your
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spending habits don't change you'll cut
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your credit utilization in half and that
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can more than offset the negative impact
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of a hard credit inquiry and a decline
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in your length of credit history the
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final factor in determining your credit
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score is credit mix which accounts for
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10% of your score if you already have a
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credit card applying for a new credit
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card shouldn't have an impact on this
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factor if you don't already have a
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credit card then a new credit card
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account on your report will have a
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positive impact on this factor further
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offsetting the negative affects of
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opening a new account good habits lead
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to good credit it can be easy to nitpick
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and get lost in all the details of how
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your credit score is calculated but
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here's the important thing to remember
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FICO rewards responsible credit usage
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yes applying for a new credit card could
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temporarily ding your credit score but
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in the long run it should provide a
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boost as long as you use your new credit
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responsibly that means making your
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payments on time and staying well below
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your credit limits as long as you're
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diligent in those two areas then getting
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a new credit card won't damage your
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credit score in fact it could even
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improve your credit score if you're
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thinking of opening a new credit card
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check out our list of the best credit
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cards on the market at fool.com
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backslash credit cards the link is in
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the video description and if you have
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your own tips or questions on getting a
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credit card or boosting your credit
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score leave them in the comments below
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and finally if you haven't already do us
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a favor and like this video and hit the
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subscribe button that will help us keep
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making these videos and sharing our best
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money advice with you thanks for
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watching and we'll see you next time on
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the isense money lab
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