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There is no shortage of credit cards that offer valuable rewards to new applicants as a sign-up bonus. And as amazing as these offers can be, many potential new cardholders are left wondering if there is a catch. Specifically, at what point will these new applications result in a drop in their credit scores? I apply for many new credit cards each year, and this is what I’ve learned.

How New Card Applications Affect Your Score

Applying for a new credit card can affect your credit in several ways, both positively and negatively. On the plus side, opening a new account and maintaining it in good standing will add to your credit history. Also, having an additional line of credit will improve your debt-to-credit ratio overall (as long as you don’t immediately max it out), which will also benefit your credit score.

On the downside, each time you apply for a new credit card, an inquiry, sometimes called a “hard pull,” will be recorded on your credit history. If you have many recent credit inquiries, your credit score can suffer as the formula interprets this behavior as a potential indicator of future credit problems. The belief is that someone who is continually looking to receive new loans may be experiencing financial difficulties, even if the real reason is that you are trying to earn multiple sign-up bonuses. Thankfully, your score will not drop dramatically, and the damage will only be temporary.

Ultimately, your credit score may even rise when you open a new credit card account, especially if you have a limited credit history or were using more than 30% of your existing credit lines before you got the new card. However, anyone who incurs debt or misses payments as a direct result of opening too many credit cards has certainly made a mistake. You can see how many credit inquiries are affecting your credit scores as well as your debt-to-credit ratio by getting your free credit report summary on Credit.com.

How Much Is Too Much?

Since I have a long credit history, opening up one or two credit card accounts in a three-month period will have a small effect on my score that is easily manageable, so long as I am not applying for other forms of credit at the same time. How does that work? It’s important to remember that your applications for new credit make up only 10% of your credit score, which is a relatively small portion compared to your payment history (35%), and your amounts owed (30%). So as I like to say and do: Pay all your bills on time, and carry very little debt, and it will be very hard not to have excellent credit.

When Not to Apply for New Credit Cards

While applying for multiple new credit cards will have a modest effect on your credit score, there are some times when it’s best to avoid applying for any new credit cards. This is the case when you are anticipating applying for a major loan such as a car loan or a home mortgage. In these instances, you will want to ensure that your credit score is as high as it can possibly be, and give yourself a margin of error even if your credit is already excellent. And if your credit score is just on the margin between excellent and good, or good and fair, the last thing that you want to do is to have your score drop slightly, and be stuck with a higher interest rate on a major loan. So before I purchased my house, I refrained from applying for new credit cards for six months, and my credit score was slightly higher than usual.

In addition, mortgage lenders typically caution all of their customers not to apply for any new lines of credit after they have been pre-approved, as their underwriters may have to start over once there is a significant change to the applicant’s credit report. Therefore, applying for a new credit card before you close on your home loan can cause the process to be delayed, and your application may even be rejected. Clearly, even the most generous sign-up bonus is not worth taking that risk.

Once you understand how new credit card applications will affect your score, both positively and negatively, you can make the best decision for your individual needs.

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  • Muddcatt

    I’ve applied for a new credit card after being pre approved for a home loan. I told the loan officer after I applied but my usage of the new card has a zero balance. How is this going to affect me going forward with the loan process?

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