Hard inquiries on your credit report can drop your score by a few points but that doesn’t mean that shopping around for a credit card is going to destroy your financial future.
It seems like one of the most ridiculous Catch-22 type situations. One of the best ways to improve your credit score and create a positive credit history is to have a credit card; however, applying for credit cards creates hard inquiries on your credit report and can cause a negative impact. Because of this, many people think that applying for a credit card is always a bad idea. That simply isn’t true.
While it is true that inquiries can negatively impact your credit score, there is a lot of other information beyond that fact that you have to consider. Applying for too many credit cards, applying for credit cards you don’t qualify for, and failing to make your payments on time are the things that are going to be truly bad for your credit.
Having a credit card helps establish or expand your credit history, gives you a lot of opportunities to boost your credit score, and it can be a very handy thing to have in your wallet in case of an emergency. In this article, we’ll explore why applying for a credit card really isn’t all that bad for you and how to make sure you’re making smart moves with your credit during that process.
What Is A Hard Inquiry?
You probably hear it all the time. Hard inquiry, hard pull, or even just credit check are all ways that people describe the process of a creditor actually running your credit report to see if you qualify for a credit card or a loan.
There are three major credit bureaus in America and they are TransUnion, Equifax, and Experian. These agencies keep track of all of your information including your payment history, credit utilization, credit age, credit mix, and hard inquiries. Those five factors are used to calculate your credit score. All of that information is contained in what is called your credit report.
Whenever you apply for a credit card, your credit report is sent to the bank or creditor that you submitted an application to. Any time that a potential lender accesses your credit report for the purpose of evaluation with the intention of extending credit to you, this is considered a hard inquiry. Every hard inquiry does show up on your credit report and will remain on your report for two years. According to the credit bureau Experian, these inquiries only impact your score for the first twelve months, though.
For someone with good to excellent credit, this is nothing to worry about. The average drop that someone in this score range could expect is less than five points in total. If you have a lower credit score, an excess of inquiries or other credit issues, a hard inquiry like this could drop your score as much as ten points. That feels like a lot and you worked hard to get your score where it is, so it is understandable that you would view this as a bad thing.
Typically, your score will see a drop of fewer than ten points, sometimes even as low as five points. Within three to six months, you can expect to see that little blip on the radar disappear as long as your credit is otherwise healthy and you are making your payments on time. Hard inquiries only account for 10% of your overall credit score. Factors like payment history and credit utilization carry a lot more weight and are reported more frequently, so they can help bring it back up if it goes down due to an inquiry.
Will There Be A Hard Inquiry Every Time I Apply For A Credit Card?
Typically, yes. In some rare cases, such as with secured cards, you may find that the creditor doesn’t need to perform a hard inquiry on your credit because you will be securing your card with a deposit. The deposit you pay determines your credit limit. Secured cards are typically designed for those with a little credit history or low credit scores. They tend to have higher interest and come with lower credit limits because the limit is set by your deposit. Secured credit cards are set up this way to help eliminate the risk for the creditor.
Because of the lack of risk, some creditors can offer you a secured credit card without performing a hard inquiry on your credit. That is definitely more of an exception than a rule, though. Any time that you apply for a credit card, you can expect a hard inquiry to show up on your credit report.
Because of that, it is very important that you don’t apply for a lot of different cards all at once, especially if you are denied by the first one. Credit inquiries and denied applications can impact your score significantly if they are occurring very frequently.
How Can I Avoid Lowering My Credit Score When Applying For A Credit Card?
Fortunately, there are a lot of great options and tools out there that can help you keep from tanking your credit score just because you need to shop around for a credit card. Even if you are submitting applications for unsecured credit cards or credit cards that do use hard inquiries (which, as you just read, is most of them), you can set yourself up for success and protect your score.
The first thing that you need to make use of are comparison tools. These are offered by a lot of different websites and even some creditors all across the web. Comparison tools allow you to look at the different terms for different cards and can tell you the range of credit scores that you want to be in in order to be eligible. Some cards, like the Chase Freedom Unlimited® card or the Capital One® Quicksilver® Cash Rewards Credit Card prefer for their customers to have good credit, which means they want a score of at least 700.
Other cards, like the Avant Credit Card and the Capital One® Platinum Credit Card, prefer for you to have fair credit, meaning a score of at least 640. There are even options for people with poor credit, like the Surge Mastercard® Credit Card and the Applied Bank® Unsecured Classic Visa® Card. Using a comparison tool to determine what a creditor expects can help you be prepared for what cards you are going to be likely to qualify for and can save you the hassle of having your credit run and then being denied.
Some tools, like those offered by Credit Karma, access your credit report for you already because they are designed to help you manage your score. Using that information, some online tools are able to provide you with your approval odds for each card. This will allow you to only apply for cards with good approval odds, which can also help you avoid multiple denials. If you’d like to use a tool like this without having to register, Nerd Wallet offers one as well.
One thing that you may see pop up when using these tools is that many credit cards will have the option to see if you prequalify. This involves a soft inquiry on your credit and gives them just the basics and doesn’t impact your credit score at all. The bureaus do not even consider this as your credit being pulled. However, the creditor will gain instant access to some of your information to determine if you are likely to qualify for the card.
A prequalification is a great tool for those of you who are genuinely not sure where you stand in terms of your credit score and would rather play it safe. There won’t be any impact on your credit score unless you decide to apply. However, the prequalification does give you a boost of confidence in your approval odds. Prequalification is not an accepted application and a full application with a hard inquiry will still be necessary before you can be approved.
The bottom line with all of these different comparison and soft inquiry tools is that you shouldn’t apply for a credit card if you’re not fairly confident that you will get it. It is normal to be nervous about applying for a credit card but, as long as you’re realistic with your expectations and you turn to these tools before allowing a hard pull, you should be fine.
Another important tip that you should know about is not spreading out your shopping. It is completely acceptable for you to want to look around for the best deal when it comes to borrowing any money. That goes for both loans and credit cards. Credit bureaus understand that you’re likely to shop around before making your final decision and they don’t have a problem with it at all. Just be careful! Credit inquiries that take place in a 45-day period or 30-day period, depending on the bureau, are typically counted as one single inquiry. This means that not every single one will impact your score; instead, multiple inquiries that fit into the designated window will only impact your score as one inquiry. Some bureaus have a window as small as 14 days, though. Make sure you’re mindful of this when looking around.
You should only apply for credit when it is necessary, too. Everyone would love to have a little bit of a buffer just in case, and that’s fine! Just make sure that you’re not excessively or needlessly applying for a bunch of different credit cards. This isn’t a situation where you want to throw it at the wall and see what sticks because that can lead to a lot of problems. If you are applying for multiple credit cards in a reckless way, you may end up taking a beating to your credit score.
Finally, the best thing that you can do to protect your credit score when you know you will need to authorize a hard inquiry is just to protect your credit score in the other, more important categories. You should make sure that you’re making your payments on time, paying your full statement balances, and resisting the temptation to max out the credit cards that you already have.
Can Applying For A Credit Card Be Good For Your Credit Score?
It absolutely can! There are a few ways that applying for new credit cards is good for your credit score, as long as you’re being smart about it, of course. One of the most important factors in your credit score apart from payment history is something called a credit utilization ratio.
The credit utilization ratio is a way for credit bureaus and creditors to see what percentage of your available credit you regularly use. Most experts suggest that you keep this number below 30%; if you have bad credit, or just want to make your credit score go up, you should stick to less than 10%.
As an example, if you have a credit card that has a limit of $1,000 and you only spend about $250 of that available balance every month and then pay it off without carrying the balance, you’re using 25% of your available credit every month. If you keep your spending habits roughly the same and you get approved for a second credit card with a limit of $3,000, but still only use that $250 each month, you’ll only be using about 6% of your available credit. Keeping this ratio low can give your score a massive boost.
On average, after being approved for a credit card, people’s scores can go up as much as 60 points. This can be because of their credit utilization ratio decreasing, their credit mix becoming more diverse, and because it helps give their payment history a boost.
The Bottom Line…
As long as you take the right approach to applying for a new credit card, your credit score should be fine. In some cases, a new credit card can help your score improve. You should never let the fear of borrowing keep you from trying. In order to be able to get the best possible deal when it comes to financing a car, or a house, you will need healthy credit. Don’t shy away from credit altogether, just be sure to make informed decisions and use your credit wisely.