If you are trying to be savvy with your personal finances, then you’ve probably considered this issue: If you can earn several hundred dollars worth of points, miles, or cash back from a single credit card sign-up bonus, why not just apply for a bunch of credit cards?
For most people, this impulse is tempered by uncertainty: What happens to your credit score if you apply for multiple credit cards just to earn the sign-up bonuses?
How applying for credit cards affects your credit score
In general, a few new credit inquiries aren’t a problem for your credit score. Just don’t go overboard.
Credit scores are confusing things, and it’s not entirely by accident. The companies that create the credit scoring formulas, like FICO, TransUnion, and Vantage Score, purposely keep their formulas a secret.
They do, however, disclose the factors they use to create credit scores, and how heavily they weigh each one. In addition, actual credit card users go online to report how different actions affect their credit scores. When you put all of this together, you can get a reasonably clear picture of what new credit card applications do to your credit score.
Applying for a credit card generates a new inquiry on your credit report. By itself, a single inquiry is not very significant. It’s normal to have a few new inquiries every year. These inquiries should not hurt your credit score much, if at all. Many new credit inquiries within a short period of time, however, can be interpreted as a sign of possible financial distress.
Think of it like someone going around town asking everyone for a loan. If your credit report looks like that, then the credit bureaus get worried you might be about to run out of money. Thankfully, the effect of these inquiries on your credit score is small, and temporary. If you have excellent credit, having several new inquiries probably won’t change that.
How opening a new credit card affects your credit
Every additional credit card you open reduces the average age of your credit accounts. But if you have limited credit, more accounts are usually a good thing.
For example, if you have one credit card that’s 10 years old, and one that’s five years old, your average account age is 7.5 years. If you add in a brand new credit card, your average age drops to five years. This could also have a small, negative effect on your credit score.
On the other hand, opening a new credit card account can have several positive effects on your credit, if you manage your accounts responsibly. This means that you must pay your bills on time and carry very little debt. Do this, and your additional credit cards will actually improve your credit score, especially if you have a limited credit history.
Having new credit cards also means that you’ll have an increased amount of total credit available to you. This will also help your credit score as it will reduce your debt utilization ratio for a given amount of debt—another minor factor in your credit score.
If you avoid interest charges by paying your credit card statement balance in full, you might not think that you have credit card debt, but, technically, you do. Your latest credit card statement balance is on your credit report as “debt,” even if you eventually pay it in full that month.
Look at the big picture
It might surprise you to learn that signing up for new credit cards doesn’t make much impact on your credit score.
All of the positive and negative factors I’ve described will largely cancel each other out. In fact, many people report their credit score going up slightly after applying for a few new cards.
But the important thing to remember is not to get lost in the details.
By far, the two most important factors in your credit score are:
- Your payment history
- Your level of debt
If you pay your bills on time and don’t carry much debt, it’s almost impossible not to have good credit.
If you miss payments and max out your credit cards, your credit score will suffer even if you haven’t applied for a new card in ages.
Only open new cards if you can manage credit
It’s safe to apply for multiple new credit cards from a credit score perspective. But the more important question is: Should you?
Do you run any risk of using the new credit cards to overspend?
Before applying for any new cards, you first need to make sure that you will be able to manage all of your credit cards responsibly. If you can’t be sure you will be able to pay your bills on time and avoid debt altogether, do NOT apply for any new cards.
Another thing that you should consider is whether or not you will be applying for a home mortgage in the next six months. If you might, then you should refrain from signing up for any new credit cards.
Banks don’t like to see too many new credit accounts from mortgage applications. Although the impact of new accounts on your credit score may have been minimal, lenders review mortgage applications manually. Keep this in mind and avoid applying for other credit in the months before applying for a mortgage.
Avoid ‘churn’, if at all possible
Finally, don’t open a new credit card account, get the bonus, and then close the account. Not only will you reduce your average account age, it’s also totally unnecessary—at least until any annual fee comes due. It’s simply good form to keep the account open for a year, and give the card a try.
If you find that the card doesn’t meet your needs after having it for a year, sure, you can cancel it. Do this more than a couple times with one bank, however, and don’t be too surprised if they say “no thanks” the next time you try to apply for one of their cards. Wouldn’t you?
Simply put: You don’t want to be that person who makes a meal out of the free samples at the grocery store without buying anything.
Applying for multiple credit cards just to earn the signup bonuses won’t ruin your credit score. In some cases, it might even help.
Still, use caution. Do NOT chase credit card rewards if you think you’ll be tempted to overspend. Find the best credit cards for your needs, with the most generous signup bonuses, and don’t get too carried away.