When you think of getting a new credit card, many questions can come to your mind, which can sometimes influence your decision. The most common question that comes to an individual’s mind before getting a new card is: Can applying for a new credit card affect my credit score? And if yes, then will it have positive effects or negative? The answer to these questions is: Opening a new credit account can affect your credit score positively as well as negatively. On one hand, it lowers your credit utilization ratio, which is good for your credit score, and on the other hand, it lowers the average age of your credit accounts, which can be the reason for your credit score getting down. This article will help you understand all the pros and cons of opening a new credit card account so that you can make your decision wisely. Keep reading to know more:
Advantages of Opening a New Credit Card
Low Credit Utilization Ratio
Opening a new credit card can help you lower your credit utilization ratio as your total credit limit increases. For example, if your credit limit is Rs. 50,000 and you spend Rs. 30,000 every month, you are utilizing 60% of your credit limit, which can impact your credit score badly. To maintain a good credit score, you should try to spend only 30% or less of your credit limit. But, if you open a new credit card with a credit limit of Rs. 1 lakh, your total limit becomes Rs. 1.5 lakhs. Now, if you spend 30,000, you are using only 20% of your credit limit, which can be very good for your credit score. So, this is how opening a new credit card account can help you lower your credit utilization and hence improve your credit score.
To achieve a good credit score, it is advisable to have multiple credit accounts rather than having just one. Your credit mix makes 10% of your credit score and hence you must try to maintain a healthy mix of your credit. Opening a new credit account will help you improve your credit score as you will have more than one credit account. Along with opening a new credit card, you can also try to get personal loans, home loans, etc for a better credit mix.
Disadvantages of Opening a New Credit Card
Whenever you apply for a new credit card, your card issuer checks your credit report and score to understand your financial behavior and your creditworthiness. This is known as a hard inquiry on your credit card. So, initially, you can notice a little drop in your credit score after applying for a credit card, but it is always good on a long-term basis.
Average Age of Credit Accounts
The average age of your credit accounts also makes a percentage of your credit score. The longer the age of your account is, the better it is for your credit score. When you open a new credit card, the average age of your credit accounts will be decreased and hence your credit score can go a bit down. For example, if you have 1 credit card account from the last 7 years, then the average age of your credit account is 7 (7/1), but when you open a new card, the average age of your credit accounts becomes 3.5 ((7+0)/2). But, this will also affect your credit score on a short-term basis and you can improve it with time.
As discussed above, opening a new credit account can have advantages as well as disadvantages. As you can see, getting a new card can only hurt your credit score on a short-term basis and it will only be advantageous in the long term. The most important thing here is: opening a new credit card will help you lower your credit utilization, which can help you a lot in improving your score as your credit utilization ratio makes up 30% of your credit score. When you get a new card, just make sure not to overspend because of the higher credit limit. So, getting a new credit card can be a good decision, provided that you know how to use it responsibly and wisely.