While the idea of opening a new credit card and the financial liberty that ensues is certainly appealing, doing so would entail scredit-score-india.jpgignificant consequences for your credit score. The manner in which you employ your credit card would be an important determinant of whether the effect of acquiring a new credit card would be positive or negative. So let’s look at the effects that opening a new credit would have on your credit score:
Negative Effects of Opening A New Credit Card
Opening a new credit card account could be detrimental to your credit score in the short term due to the following factors:
Average Credit Age: Credit age is a significant constituent of your credit score and is determined by the age of your oldest account, newest account, and the average age of all the accounts. When you open a new credit card, the average age of your accounts gets lowered which can lower your overall credit age. This can especially be exacerbated if you don’t have many accounts and haven’t opened a new one in a while.
A Hard Inquiry: When you apply for any form of credit, lenders always do a credit check on you to determine whether you are a reliable borrower. This causes a hard inquiry on your credit report and results in a temporary decrease in your credit score. However, if you indulge in too many hard inquiries, it can cause a substantial decrease in your credit score. It would be better to space your credit applications in order to avoid a significant hit to your credit score.
Augmented Credit Utilization: Credit Utilization refers to the ratio of your expenditure through your credit card relative to your credit limits. If your credit card balance is comparable to your credit limit due to unfettered spending then your credit score is bound to take a hit. A substantial portion of your credit score is determined by how much of the credit available to you is being used. It is advisable to always keep your Credit utilization below 30%, if not more, to maintain a decent credit score.
Positive Effects of Opening New Credit Card
A new credit card need not only have deleterious consequences for your credit score. Opening a new credit card can also improve your credit score in the following ways:
Lowering your Credit utilization: If you avoid making any new expenditures on your new credit card, you can improve your available credit utilization as the total credit available to you would increase due to the new credit account while your expenditure remains constant.
Improving your credit mix: If you don’t have a credit card, opening a new credit card account can diversify your credit mix. Your credit mix indicates the diversity of your credit accounts and a good credit mix bolsters your credit score. It is indicative of your ability to obtain and take care of various kinds of credit and is considered a good indicator by lenders. So, opening a new credit card account can improve your credit mix, which constitutes a substantial portion of your credit mix. So, an increase in credit mix can boost your credit score.
Enhancing your payment history: If you haven’t had the best of track records when it comes to credit and loans, then opening a new credit card account can provide you just the opportunity that you need to rebuild your payment history. Payment history is probably the most important part of your credit score and amounts to about 35% of your credit score. You can improve your payment history by making your credit payments on time. This will establish your reliability as a borrower and if you remain consistent in your payments, then you can increase your score in the long run. Even if you don’t have a woeful payment history, timely payments can help you build your credit score and make it easy for you to obtain credit in the future.
Opening a new credit card does have a short-term effect on your credit score that may vary slightly depending upon variance in an individual’s circumstance. However, the long-term effects of doing so depend more on your credit habits than anything else. So, if you have the habit of being regular and timely in your payments, if your use your credit wisely, and do not take on excessive credit, then you would be able to overcome any short-term effects of opening a new credit card and would be able to get the maximum benefit out of it.