This is a question I get a lot, and for good reason. This scenario takes place all the time, so individuals are constantly worried about the impact.
It’s further compounded by the fact that you need a certain credit score to get approved for a credit card, so it starts to become a catch-22.
Anyway, the best way to figure it all out is by breaking it down.
The Lending Process
When you apply for any line of credit, whether it’s a credit card, an auto loan, or a mortgage, the creditor will pull your credit report with one or all three of the credit reporting agencies.
They do this to ensure you’re a creditworthy borrower, and to avoid lending to someone who is a high default-risk.
When they pull your credit, they can see if you are a low credit risk, a medium credit risk, or an extremely high credit risk.
From there, they can decide whether to approve you for the new credit line requested, or deny you.
But this is where it all gets a little funny. At the same time a creditor is determining your credit risk, your credit score drops.
Credit Scores Drop When You Apply for Credit
Say what? That’s right; when a creditor pulls your credit report, your credit score generally drops.
But why, you ask? Well, whenever a creditor pulls your credit, it is known as a “credit inquiry,” and these inquiries tell other creditors that you are looking for new credit.
And when an individual is looking for new credit, they are seen as a higher risk to all other creditors, at least temporarily.
If you’re lost, I don’t blame you. Let’s put it another way, using an example to illustrate.
Assume you need a loan. You ask a friend for $1000 and they begrudgingly agree to lend you the money.
A week later, you ask another friend for a new loan, of say $500. If your friend didn’t know about the prior loan, they may be up for lending you the money.
But if they had heard that you just borrowed $1000 from another friend, they may be more hesitant.
After all, you would owe two people money, so it’s probably going to take you a while to pay everyone back, assuming you do at all.
This makes you more of a credit risk, and explains why credit inquiries wind up in credit reports.
Without them, creditors wouldn’t know what you’ve been up, and wouldn’t be able to accurately gauge the risk you present to them.
Yes, Applying for a Credit Card Can Hurt Your Score
So yes, when you apply for a credit card, it can hurt your credit score, at least in the short term.
Of course, your credit score may only fall 5-10 points, if that. This generally doesn’t matter all that much, but it can if you’re applying for more important loans, such as a mortgage.
That’s why it’s always recommended that you don’t apply for anything else when in the process of obtaining such loans.
If you’re not shopping for a new home, don’t fret. Even if your credit score dips a bit, if you practice healthy credit habits with that new credit card, it can actually help your credit score over time.
In other words, your credit risk is heightened when applying for credit cards, but falls pretty quickly once the dust settles.
Regardless, your priority should be your finances, not your credit score. If you need a credit card, apply for one.
Read more: Does closing a credit card hurt your credit score?
(photo: phatman)