From applying for a credit card to how you use it to when you pay it off, credit cards majorly impact your credit score in so many ways. So, if you’re thinking about opening a new credit card, here are a few pros and cons to consider for your credit score!
Pro: Increasing your credit diversity boosts your credit score
You may not have a credit card right now, but you might have other forms of credit: a car loan, a personal loan, or perhaps a mortgage. These forms of credit are called installment loans. With installment loans, you make regular payments to pay back a set amount. Once it’s all paid off, the account is closed.
Meanwhile, credit cards are considered a type of revolving credit — credit that you can borrow from over and over, as long as you make minimum monthly payments. If you only have installment loans at the moment, adding a revolving credit account to the mix improves your credit score, showing lenders that you can responsibly manage different types of credit.
Con: Applying for a credit card can temporarily hurt your credit score
Whenever you submit an application for a credit card, the issuer will evaluate your credit score and history, such as how often you made on-time payments in the past and how much of your credit card balance you’ve used. This is called a “hard pull.”
A hard pull can cause your credit score to drop by a few points — whether you’re approved for the new card or not. Your score will bounce back in under a year, but the hard pull will stay on your credit report for about two years.
Con: A new credit card can hurt the average age of your accounts
When you open a new credit card, you bring down the average age of your credit accounts. Credit score models consider that average age when calculating your credit score. So, if the average age of your accounts decreases, it can ding your score.
However, the length of your credit history is a lower-priority factor when these models calculate your score, so the impact should be minor.
Pro: A new credit card improves your credit utilization ratio
One influential factor that affects your credit score is your credit utilization ratio. This is the amount of money you owe as a percentage of your total credit limit.
Let’s say you have only one credit card with a total limit of $10,000, and you owe a total of $1,500. In this case, your credit utilization ratio is 15%. Generally, the lower that percentage is, the better. A utilization ratio above 30% could start to damage your credit score.
Opening a new credit card instantly grows your total credit limit, which means your utilization ratio will decrease — good news for your credit score!