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One of the more confusing aspects of rewards travel is how applying for credit cards affects your credit score. If you're considering applying for a new card, you might wonder if adding a credit card can improve your credit score. Conventional wisdom has it that applying for more credit cards will negatively affect your credit score and is somehow frowned upon by lenders and credit providers. But that’s not necessarily the case.
Your credit score does take a temporary dip when applying for new cards, particularly if applying for more than one in a short period. But provided you do the other things to maintain healthy credit — like paying your credit card accounts on time and in full every month — adding more credit cards to your points and miles arsenal can actually increase your credit score over time.
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How Are Credit Scores Calculated?
Our post on how to manage your credit score covers this in more depth, but here's a recap. Credit bureaus calculate your credit score on the following criteria for your FICO score:
- 35% payment history: Late payments represent a much higher credit risk for lenders
- 30% amounts owed: Also referred to as credit utilization rates or available credit versus how much is in use
- 15% length of credit history: Average age of revolving debt accounts
- 10% new credit: Hard pulls (credit inquiries from applications) and new accounts show here
- 10% credit mix: Ensure you have diverse types of credit, like car loans, mortgages, guarantor accounts, credit cards, etc.
Essentially, lenders want to see you diversifying your credit portfolio over a sustained period, paying your bills on time, and keeping your utilization rates low. If you tick all these boxes, credit providers are often more than happy to offer you new cards and financial products — or even increase your credit limit on existing cards — as you represent a “safe bet.”
We recommend keeping a close eye on your credit score, checking it weekly via a free FICO access offered on cards like the Citi Strata Premier℠ Card or Amex EveryDay® Credit Card. You also can get a free copy of your detailed credit report every week.
Alternatively, use a service like Credit Scorecard from Discover or Credit Karma to ensure cards and payments are updating on your credit file correctly. This way, if anything untoward pops up that gives you cause for concern, you can immediately address the issue. For even more options, check out the full list of free credit score and reporting services.
Why Do Credit Scores Dip When You Get a New Credit Card?
When you apply for a new credit card, the credit provider performs a credit check, otherwise known as a “hard pull.” A hard pull gives the potential lender access to your entire credit report, which can help them decide whether you’ll receive approval for the card, the amount of credit you'll be provided, and the interest rate on the card. Hard pulls or credit inquiries cause a small, temporary drop in your credit score. Expect an immediate drop of two to five points per inquiry. However, this could be higher if you have limited credit, such as those applying for their first credit card.
Too many inquiries in a short timespan will cause a more pronounced dip in your credit score; that's one of the reasons we recommend spacing applications out over a longer period. The dip in your credit score starts to fade within weeks of the application. Typically, you'll see the impact from that inquiry fade within six months; at the 12-month interval, that hard inquiry likely has no impact on your credit score (depending on the exact scoring model and version used).
From this point on, provided you follow the credit card best practices set out above, adding a credit card can improve your credit score, helping to increase your credit score over time. That's because you'll have more available credit and additional accounts showing good behavior on your credit report.
How Adding a Credit Card Improves Your Credit Score
Opening a credit card account can improve your credit score by lengthening the combined age of your credit accounts, lowering your credit utilization rates, diversifying your credit portfolio, and showing your ability to manage a significant amount of revolving credit responsibly. These are all factors that play key roles in calculating your credit score.
Extend the length of your credit history
One of the key factors credit agencies look at when calculating your credit score is how long accounts have been open. Having just one or two accounts open for a short length of time may count against your score initially, but over time it adds to the overall length of your credit history, gradually increasing your credit score. One of the reasons we recommend downgrading credit cards instead of canceling them outright is that credit lines with a long history can help improve your credit score. Opening a card now won't help in this area, but keeping it open for years to come will.
Reduce your credit utilization rate
Credit utilization plays a huge role in determining your credit score. Almost a third of your credit score is calculated by your use of existing lines of credit, with lower utilization rates looked upon more favorably than high ones. So, how do more credit cards help lower your utilization rates?
The more credit cards you have, the higher your total available credit, which lowers your utilization rate, as long as you keep the same spending habits. Here's a simple example of how that could work:
- If you have one credit card with a $10,000 limit and you spend $3,000 per month, your utilization rate is 30% ($3,000 / $10,000).
- If you get a second credit card with a $10,000 limit and still spend $3,000 per month on cards, your utilization is now 15% ($3,000 / $20,000).
- Imagine if you have five credit cards, each with $10K limits ($50K total) and you still spend $3K per month. Your utilization rate is now 6% ($3,000 / $50,000).
Bottom Line: Does Adding a Credit Card Improve Your Credit Score?
So, does adding a credit card improve your credit score? Absolutely! If used responsibly and paid off in full each month, rewards-earning credit cards can not only help push your credit score higher but can provide access to amazing travel experiences for pennies on the dollar. And, higher credit scores mean you can be approved for better cards.
If you want to live in the points and miles world for the long term and exchange credit card rewards for excellent travel adventures, you need to look down the road — not just at the present. Mix up the types of credit you access, don't apply for too many cards in a short time period, keep your credit utilization rate low, and pay your accounts off in full each month. And make sure any card you pick up helps you focus on your travel goals.
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