Opening a new credit card can have both positive and negative effects on your credit score. Before applying, consider how a new card could impact your overall financial health, taking into account potential benefits like promotional interest rates or rewards programs. Let’s dive into how this decision can affect your credit score.

How Can Opening a New Credit Card Help Your Credit?

Opening a new credit card can improve your credit score through several mechanisms. Here’s how:

1. Increase Your Available Credit

Opening a new credit card boosts your overall available credit, which can help improve your credit score. This occurs because a higher total credit limit can lower your credit utilization ratio. Credit utilization is the percentage of available credit you’re using. Maintaining a low utilization rate is crucial for your credit score, as it’s a significant factor in your overall credit health. Experts recommend keeping your credit utilization under 30%, but the ideal rate is even lower, often in single digits.

For instance, if you already have a credit card with a $5,000 limit and you open a new card with a $3,000 limit, your total available credit increases to $8,000. If you keep your spending the same, your utilization ratio decreases, which can positively impact your credit score. However, to fully benefit, avoid maxing out the new card and strive to pay off your balance each month.

2. Improve Your Credit Mix

Credit mix, or the variety of credit types you have, accounts for 10% of your credit score. Lenders like to see a mix of installment credit (such as auto loans or mortgages) and revolving credit, such as credit cards. If your credit profile currently includes only installment loans, adding a credit card can diversify your credit mix and potentially boost your score.

This means that having both types of credit accounts may signal to lenders that you can responsibly manage different kinds of debt. For example, adding a new credit card to your credit profile, which already includes student loans and a car loan, could strengthen your credit mix and enhance your credit score.

3. Build a Positive Payment History

Your payment history is the most critical factor in determining your credit score, accounting for 35% of your total score. Opening a new credit card gives you the opportunity to build a positive payment history, provided you consistently pay your bill on time. This means paying at least the minimum payment by the due date each month.

Paying off your balance in full each month is ideal for avoiding interest charges. If that’s not possible, making on-time payments can still add positive data to your credit history and help improve your score over time.

How Can Opening a New Credit Card Hurt Your Credit?

While there are benefits to opening a new credit card, there are also potential downsides that could negatively impact your credit score:

1. Hard Inquiry on Your Credit Report

When you apply for a credit card, the issuer typically conducts a hard inquiry on your credit report. This process involves checking your credit to assess your risk as a borrower, which can lead to a small, temporary drop in your credit score—usually by less than five points. While hard inquiries remain on your credit report for two years, their impact on your credit score is usually short-lived, lasting less than a year.

Multiple hard inquiries in a short time frame can add up, potentially reducing your score further. To minimize the impact, limit your applications and consider getting prequalified for credit cards, which usually involves a soft inquiry that doesn’t affect your score.

2. Lowers the Average Age of Your Accounts

Opening a new credit card reduces the average age of your credit accounts, which can have a slight negative impact on your score. The length of your credit history influences 15% of your credit score. Thus, a younger average account age may result in a lower credit score.

However, the benefits of building a positive payment history and keeping your credit utilization low often outweigh the drawbacks of a slightly reduced average account age. Being selective about when and why you open new credit accounts can help you maximize the positives.

Tips for Building Credit With a New Credit Card

If you’re opening a new credit card to improve your credit score, follow these tips to build credit responsibly:

• Make On-Time Payments: Your payment history is the largest component of your credit score. Pay your credit card bill on time every month to avoid late fees and negative marks on your credit report.
• Keep Your Credit Utilization Low: Use your credit card sparingly to keep your utilization ratio low. A practical way to build credit without incurring debt is to use your card for small, manageable expenses that you can pay off in full each month.
• Follow a Budget: Avoid overspending by sticking to a budget. This will help prevent debt from accumulating, which could hurt your credit score and finances in the long term. Use your credit card responsibly by only spending what you can afford to repay.

How Many Credit Cards Is Too Many?

The number of credit cards you should have depends on your personal preferences, spending habits, and ability to manage multiple accounts. Having at least one credit card can be beneficial for building credit. Beyond that, multiple credit cards can help you increase your available credit and maximize rewards programs, but only if you’re diligent about monitoring your spending and making on-time payments.

If you struggle to keep up with payments or your spending increases significantly with more available credit, it may be best to limit the number of credit cards you hold.

Should You Close Old Credit Cards?

Keeping old credit cards open can be advantageous for your credit score because it maintains your available credit and helps your average account age. Closing a card could negatively impact your credit utilization ratio and reduce the length of your credit history, depending on the scoring model.

However, there are times when closing a credit card makes sense, such as when you have a card with a high annual fee that doesn’t provide value or when having access to more credit is leading to overspending.

The Bottom Line

Does opening a new credit card improve your credit score? It can, as long as you manage it well. While you may see a small initial dip in your score from a hard inquiry, a new credit card can positively impact your payment history, credit mix, and available credit in the long term.

Before applying for a new card, assess your financial goals and consider alternatives, such as becoming an authorized user on someone else’s credit account. A well-managed credit card can be a useful tool in building your credit profile and achieving your financial goals.

If you ever need expert assistance or guidance on your credit journey, don’t hesitate to reach out to the Nerds! Additionally, stay updated with the latest tips and information by following us on Facebook, Instagram and TikTok!