4 Common Credit Card Transactions That Impact Your Credit Score

Chances are you have at least one credit card—nearly 80% of American adults do—and you already know that credit cards impact your credit score. But in what ways? What happens to your credit score when you open a new card, close an old one, or transfer a balance?1

Let’s dive into four common credit card scenarios, and see how they can potentially help or hurt your credit score.credit cards

Credit Cards 101: How Do Credit Cards Affect Your Credit Score?

1. Applying for a new credit card

Simply applying for a new credit card (or any other type of loan) could impact your credit score, regardless of whether you actually open the card or not. Here’s why:
When you apply for a new credit card, the lender evaluates various pieces of information as they decide if they’re willing to lend you money, and what your credit limit and interest rate will be. A key piece of information is your credit report, which includes items like your loan payment history and credit card balances.

To access your credit report, lenders must submit an inquiry, which is then reflected on your credit report. Credit reporting bureaus differentiate between two types of inquiries: hard and soft.

  • Hard inquiries occur when a financial institution—like a bank, credit card company or mortgage lender—accesses your credit report because you are applying for credit. Hard inquiries are typically only made with your permission and are reflected in your credit score. Hard inquiries are visible to anyone who accesses your credit report.
  • Soft inquiries occur when someone accesses your credit report—but not because you are applying for new credit. For example, employers or landlords might submit soft inquiries as part of their background checks. Soft inquiries are not reflected in your credit score and are only visible to you.

Note: Some lenders use a soft inquiry in order to show an applicant their initial offers. At Upgrade, when you check your rate for a personal loan we perform a soft inquiry on your credit report, which does not impact your credit score. If you accept a loan offer and submit your application for review, we will perform a hard inquiry, which may impact your credit score. A new borrower may see a small drop in their credit score when they apply for a new loan, but the score typically climbs back up with time and on-time payments.

Hard inquiries can lower your credit score. Each time you take on more debt, the risk that you won’t be able to make all your payments increases. As such, your credit score will generally decrease when a hard inquiry is submitted because it indicates you are applying for new credit.

The amount of points you’ll lose per hard inquiry isn’t set in stone; it depends on your personal credit history. For most people, each hard inquiry will take less than five points off their credit score.2 Remember, hard inquiries for every card application are incorporated into your score (unlike inquiries for other types of credit, such as a mortgage, which can be treated as a single inquiry by the credit scoring companies if you are shopping around for the best rate in a short time period). Learn more about how applying for credit impacts your credit score.

The record of a hard inquiry stays on your credit report for 24 months, but its impact on your credit score lessens with each passing month and is relatively short-lived. In fact, your credit score will usually return to its pre-inquiry level within about six months.

2. Opening new credit card 

If you decide to open a new credit card, several factors can impact your credit score.

  • Credit utilization ratio: Credit utilization measures the balances you owe on your credit cards relative to the cards’ credit limits. Both FICO and Vantage, two big credit scoring agencies, list credit utilization as the second highest factor they consider when determining credit score, right behind payment history. Credit utilization ratios can be calculated for each credit card (card balance divided by card limit) and on an overall basis (total balance on all cards divided by sum of credit limits). The general rule of thumb is to stay below 30% credit utilization for each card and across all your cards.3
    • Opening a new credit card and keeping a low balance could be beneficial for your credit utilization ratio; opening a new credit card and piling on a high balance relative to the credit limit would be detrimental to your credit utilization ratio—and therefore your credit score.
  • Average account age: The average age of your credit lines (credit cards, loans, etc.) has a major influence4 on your credit score. Generally, a longer credit history will boost your score. As such, a brand-new credit card will lower your average account age, which can ding your credit score.
  • Credit mix: Your credit mix—the different types of loan products in your credit history—has a lesser influence on your credit score (about 10%). Scoring models often consider your ability to responsibly manage different types of financing. If you’ve previously only had personal loans, auto loans or other installment debt, opening a credit card could diversify your credit mix and potentially boost your score.

When you add up all the factors, will opening a new card help or hurt your credit score? There is no definitive answer for everyone—it truly depends on your personal credit history.

For example, if you have several other credit accounts that have been established for many years and you don’t plan to immediately load up the new credit card with a high balance, the new card might help your score thanks to an improved credit utilization ratio.

On the other hand, if you’ve opened a slew of new credit cards in recent months and will max out the limit on the new card, your score might be headed south—especially if the extra credit means you’ll struggle to make on-time payments.

3. Closing a credit card account

If you’ve paid down the balance on an existing credit card, you may be tempted to close it—less is more, right? You may want to think twice. It comes back to your credit utilization ratio: Closing a card shrinks the overall amount of available credit you have relative to your balances, which can cause your credit score to decline.

Closing a card might also hurt your average account age, especially if it was a long-standing account. Your credit mix could also be negatively impacted.

4. Transferring a balance

Some borrowers move debt from one credit card to another, generally to make the most of a lower annual percentage rate (APR). If you’re transferring a balance to an existing card with a lower APR, you’ll be saving on interest but likely hurting your credit utilization ratio and credit score. Here’s an example:

Current cards

Balance Limit Utilization Ratio
Card 1 $2,000 $5,000 40%
Card 2 $3,000 $10,000 30%
Overall $5,000 $15,000 33%

 

Transferring balance from Card 1 to Card 2 

Balance Limit Utilization Ratio
Card 1 $0 $5,000 0%
Card 2 $5,000 $10,000 50%
Overall $5,000 $15,000 33%

 

Remember, scoring models look at your credit utilization across all cards—and for each individual card. By transferring a balance to an existing card, your overall utilization stays at 33%, but your utilization on Card 2 jumps to 50%, which can hurt your credit score.

What if you transfer the balance to a new card?

Transferring balance from Card 1 to a new card 

Balance Limit Utilization Ratio
Card 1 $0 $5,000 0%
Card 2 $3,000 $10,000 30%
New Card $2,000 $10,000 20%
Overall $5,000 $25,000 20%

 

In this scenario, your utilization ratios improve for each card and overall. While you might see a minor short-term decline in your credit score because you applied for a new credit card, your score is likely to benefit in the longer run, since credit utilization is a more influential factor in the calculation of credit scores than hard inquiries.

Keep in mind that many balance transfer offers have fees associated with them, and the attractive promotional rate isn’t forever—your APR could rise to something much higher than what you were paying on the old card. Make sure you account for the fees and potential rate changes when you think about the total cost of a balance transfer.

 

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1. Gallup Debt Survey
2. MyFICO.com Hard Inquiries
3. VantageScore Credit Card Utilization
4. Vantage Score influences.