Checkpoints Before Opening A New Credit Card
1. Four is the Magic Number
The number of open accounts showing on your credit report is what contributes to the biggest category of your credit score your payment history. Someone with 0 open accounts will greatly benefit from opening even 1-2 new accounts. Someone with 3 accounts will see a small score boost from opening a 4th. But once you have 4 or more open accounts, the score increase from adding more accounts is nominal. And considering the impact of the inquiry , its fairly common for scores to temporarily drop when adding a 5th or 6th open account. This is part of the reason why the customer in the example above experienced a score drop.
2. Variety Matters
Having 4 accounts is generally the goal, but its not the only thing that matters. Make sure you have enough variety of account types . According to Fair Isaac Corporation , about 10% of your credit score is based on your variety of account types. After all, having a good variety of account payment history shows that you can handle a mixture of credit.
In the example above, the customer already had 2 open credit card accounts. Thats why we didnt recommend opening another card. The loan officer did. But, since the customer already had 2 cards, opening another one wasnt going to help the score.
Side note: whenever you apply for a new account, make sure it actually reports to all 3 of the credit bureaus. Some creditors report to just 1 or 2 of the 3 bureaus.
Heres an example of what you shouldnt do:
Use A Credit Builder Credit Card
If you’ve never borrowed money before, you might assume this means you have a good credit score. In fact, this is unlikely to be true.
That’s because when assessing your application, lenders look for evidence that you’ll be able to pay back what you borrow, so having no record of successful repayments can count against you.
Experian estimates 5.8 million people have a thin file in the UK. This means that credit reference agencies dont hold any information on you which makes you invisible to the financial system. This can lead to not being able to access products such as a mortgage, loan or credit card, or facing higher costs than others.
Consequently, you may find that you’re turned down for credit cards and loans especially those on the cheapest rates – even if you could comfortably afford to pay them back.
One solution is to take out a credit card specifically designed to help you build – or rebuild – your credit history.
However, as these ‘credit builder’ cards are aimed at higher-risk customers, APRs tend to be very high, so you should never use them to borrow.
How New Credit Can Lower Fico Scores
When applying for new credit, an inquiry is placed on your credit report. That means, for instance, if you’re trying to get a new credit card, the lender will “inquire” into your credit report from one of the three major credit agencies. Depending on the other factors in your report, this inquiry can lower your score by a few points.
A new credit card or line of credit will also affect your length of credit history. This part of your score is made up of your “oldest” account and the average of all your accounts. Opening new credit lowers the average age of your total accounts. This, in effect, lowers your length of credit history and subsequently, your credit score.
New credit, once used, will increase the “amounts owed” factor of your credit score. Amounts owed is composed of credit utilization the ratio of your credit balances to your credit limits. Very often, the lower your credit utilization , the higher your credit score. When you open and use a new credit card or line of credit, you’re getting closer to your credit limit, which could mean a lower score.
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Monitor Your Own Credit Score
Do you know what is awesome? When you can monitor your own credit score and see what may be bogging it down. You can use sites like to look at your credit score for free. Gone are the days you have to wait once a year to see your credit score. See if you have any derogatory marks and do your best to fix them!
How Does Opening A New Credit Card Affect Your Credit Score
First, let’s look at how a new credit card might help you improve your credit score:
- Increase available credit: Opening a new credit line increases your available credit, which can positively affect your credit score. The key is to keep the balance relatively low so your available credit stays high. This is known as your , and it’s best to keep your overall credit usage under 30%. For the best impact on your scores, keep your credit utilization as low as possible.
- Improve credit mix: Your refers to the different types of accounts you have in your credit file. There are many types of debt accounts and two broad categories: installment credit and revolving credit. Installment credit refers to loans you take out and repay a single time, such as mortgages, car loans and personal loans. Revolving credit refers to accounts you can charge a balance on, repay and reuse, such as credit cards and home equity lines of credit. Credit mix makes up 10% of your score, so opening a new credit card may be helpful if most of your existing accounts are installment loans. That said, avoid opening a credit card solely to diversify your credit accounts.
- Opportunity to establish strong payment history: Payment history comprises 35% of your credit score, making it the No. 1 influence on your credit. When you open a new credit line, you have a chance to build up a history of on-time payments by paying your bill by the due date every month.
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Is A New Credit Card Right For You
Theres no denying the benefits of credit cards. When you use a credit card responsibly, it can help you build credit and earn valuable rewards in the process. A credit card is also one of the safest ways to pay for transactions thanks to the robust fraud protections available through the Fair Credit Billing Act.
But there are some instances where a new credit card might not be a good fit for youat least not for now. As mentioned, if you plan to apply for major financing in the next three to six months, you may want to put off all non-essential credit applications in the interim.
A new credit card might also be a bad idea if you dont trust yourself to avoid racking up additional debt. When you revolve a balance from month to month on your credit cards, its expensive. This bad financial habit could also trigger an increase in your credit utilization rate. Higher credit utilization might lower your credit score even if you keep your monthly payments on time.
Are you worried the additional credit limit of a new credit card will be too tempting? If so, its better to focus on budgeting and paying off debt first, before opening a new account.
Ask Yourself Why Do You Need This Increase
If you want an increase because you need the money to live then please dont apply for it. Using a credit card is a ridiculous way to fund your life. It is crazy expensive. Now is the time to cut up those credit cards and not use them at all. Stop spending money, get four jobs and start saving. Please dont use credit cards to fund your life.
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Your Monthly Credit Card Payments
Your last credit card payment amount is listed on your credit report, but it’s not factored into your credit score. Even so, your payment amount can indirectly influence your credit score. Remember that your balance relative to your credit limit is included in your credit score. Larger payments reduce your balance faster and can help boost your credit score.
The timeliness of your credit card payments is one of the most important factors influencing your credit score. On time credit card payments help boost your credit score while late payments will bring your credit score down.
On most types of accounts, late payments aren’t reported to the credit bureaus until they’re 30 days late. You might have to pay a late fee if you’re a few days late on your credit card payment, but your credit score should be safe as long as you pay before you’re 30 days past due.
Think About Consolidating Your Debts
Consider consolidating your debts – identify which of your credit accounts are most expensive and see if you could consolidate them into a one, lower-cost loan.
This won’t directly improve your credit score, but it could your debts more affordable right now .
But if this enables you to close several credit accounts you struggle with, it could help improve your score as you’ll have fewer accounts open.
Become An Authorized User On Someone Elses Account
If youre new to credit and cant qualify for your own credit card, becoming an on someone elses account can be a great way to get started. But its a double-edged sword: If the person who owns the account has healthy credit, it can help you establish a positive credit history over the long run. On the other hand, if they miss payments or carry high credit card balances, that could also reflect poorly on you. Thats why its important to pick someone you trust who has a longer credit history and higher credit scores than you do, and who overall has a positive credit history.
What Is New Credit
New credit makes up 10% of a FICO Score. When you apply for new credit, inquiries remain on your credit report for two years. FICO Scores only consider inquiries from the last 12 months.
People tend to have more credit today and shop for new credit more frequently than ever. FICO Scores reflect this reality. However, research shows that opening several new credit accounts in a short period of time represents greater risk – especially for people who don’t have a long credit history. Your FICO Scores take into account several factors when looking at new credit.
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Does Getting Approved For A Credit Card Help Your Credit Score
Youve probably heard that applying for credit will likely create an inquiry on your credit report reviewed as part of the application process. You also probably know that inquiries can lower your credit scores. Fortunately, the impact to your credit scores from an inquiry or two will usually be small, and is fairly temporary since credit scoring models are usually most interested in inquiries within the past 12 months.
But what if you are approved for the credit youre seeking? Does that change the impact on your credit? One reader asks:
Can you please clarify this for me? My current understanding is that if you apply but do get approved, thats a good thing for your credit and it should go up instead of down. Is that right?
It must be a question on a number of peoples minds, as another reader recently asked:
If I apply for a credit card, I should have a hard inquiry on my credit report, and points should be taken off. I was wondering if there is a difference getting approved and not getting approved from that hard inquiry? For example, if I apply for a card and dont get approved, hurt my score? If I apply and do get approved for whatever type of loan I was applying for, will that also hurt my score?
Now, what if you dont use the card right away? Will that affect your scores? A reader who is just starting to build credit asks:
Get A Handle On Bill Payments
More than 90% of top lenders use FICO credit scores, and theyre determined by five distinct factors:
- Payment history
- Age of credit accounts
- New credit inquiries
As you can see, payment history has the biggest impact on your credit score. That is why, for example, its better to have paid-off debts, such as your old student loans, remain on your record. If you paid your debts responsibly and on time, it works in your favor.
So a simple way to improve your credit score is to avoid late payments at all costs. Some tips for doing that include:
- Creating a filing system, either paper or digital, for keeping track of monthly bills
- Setting due-date alerts, so you know when a bill is coming up
- Automating bill payments from your bank account
Another option is charging all of your monthly bill payments to a credit card. This strategy assumes that youll pay the balance in full each month to avoid interest charges. Going this route could simplify bill payments and improve your credit score if it results in a history of on-time payments.
Use Your Credit Card to Improve Your Credit Score
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Is It Bad To Have Too Many Credit Cards
Every time you repay your credit balance you are showing other creditors that you’re a reliable person to lend money to. This could help with future applications for larger amounts of credit, such as a mortgage.
While credit cards are a great way to borrow for short periods of time, the greater the number of credit cards you have the greater the risk from fraud.
Also, lenders look at your potential credit as well as your actual debt when deciding whether to lend to you, so having a lot of credit cards might mean they are reluctant to approve your application for even more credit. Plus you have the temptation to take on potentially more debt than you can afford to repay.
What Do You Need A Bigger Card Limit For
The basic entry level of credit from your bank is fine for most small to medium transactions in life. It is fine to buy low cost goods over the internet or movie tickets or your online groceries.
But if you need to rent a car, they will carry out a pre-authorisation on the credit card for the full amount including excess amounts. This could be for as much as $3,000.00.
Maybe you need to book an expensive holiday online or over the phone. This might be $5,000 or $10,000 easily.
Or if you want to buy a big ticket item like a motorcycle or a fish tank and you want your purchase to be protected, then you will need a big credit card limit.
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Does The Avant Credit Card Have Other Benefits
Given the fact that the Avant Credit Card is a bit of a starter credit card, it doesnt provide that many rewards. As a starter credit card, this is not that important. Remember, the credit card is used more to build a credit score than anything else. If you use this credit card and are responsible with it, you will be applying for the cards with big benefits in no time!
That being said, we are happy to say that it does provide some benefits. For one, it is an unsecured credit card. This is opposed to what is a secured credit card. With a secured credit card, you have to make a security deposit when signing up.
This deposit is then used as collateral for your borrowing habits. In the case of a secure credit card, your credit limit is usually equal to the collateral. This does not happen with the Avant Credit Card. You do not have to put up that initial collateral to get your hands on your card.
There are other few benefits that come with the card being a Mastercard. For one, you get a 15% discount on airport Meet and Greet services.
You can also get an emergency credit card replacement should you lose your card as well as theft protection. The latter is a service that provides help to a team of specialists that address identity theft issues.
Now, these are relatively few and generic benefits, but it is understandable for a starter credit card. Once you move to bigger credit cards, the rewards improve.
Reasons You Should Get A Second Credit Card
It might be a good time to get a second credit card if youre looking to:
- Improve your credit score. There is a benefit to having more cards, said Tamar Asken, a certified financial planner and real estate agent in Los Angeles. Having two or three cards is one kind of proof that you can manage debt and credit and maturely meet obligations, she said. Plus, it will increase the total credit available to you, which, if you dont use most of it, raises that all-important FICO score.
- Have a backup in case of emergency. Say you lose your card. Most credit card companies will rush out a replacement within 72 hours, said Martin Lynch, a compliance manager with Cambridge Credit Counseling Corp. in Agawam, Massachusetts. But especially if youre traveling, youll have a new one that can tide you over, he said. Lynch has three credit cards, one of which stays home in case his wallet gets lost or stolen.
- Diversify card benefits. Maybe your one card is a plain charge card. A second card could be a rewards card. Or, if you already have a travel awards card, a second one could be a cash back card. The second card you can use that to balance what youre not getting from the first card, said Beverly Harzog, consumer credit expert and author of the book The Debt Escape Plan.
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