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Open that New Credit Card or Pass on the Offer?

Consider these key points before you accept that new credit card offer. It could cost you more in the long run.

By Michelle Petrowski, CFP

Whether you’re “suddenly single” due to divorce or widowhood, beginning to build your credit score due to your age, or just keep getting offers in the mail, when deciding to open another credit card consider the impact on your current credit score. Will it go up or down? Help or hurt?

Michelle Petrowski, CFP®, CDFA® (formerly Michelle Buonincontri), is a financial planner, wealth manager, divorce financial strategist, and personal finance coach. She is the founder of Being in Abundance and Being Mindful in Divorce, as well as an avid volunteer at Savvy Ladies in NY and Fresh Start Women's Foundation in Phoenix, and has worked closely with the Arizona U.S. Service Members. Michelle has been featured in CNBC, Forbes, MarketWatch, Investment News, Yahoo Finance, and other media outlets. You can email her at Michelle@BeinginAbundance.com or schedule a Q&A call with her here.

Michelle Petrowski

Our credit score can determine the interest rates we’re charged on loans, the rates we’re charged for car insurance, if a security deposit is needed to turn on utilities, and even impact a job offer. So, before doing anything, get your credit score to create a baseline to measure the difference opening an account made. This article, “How to Get Your Credit Score” provides some useful information on how to obtain a credit score for free, and for a fee.

How can applying for a credit card hurt your credit score?

Most times, when applying for a new card, the creditor will do a “hard” credit pull to assist in deciding whether to approve your application. Consequently, this could initially lower your score, whether you are approved or not for the credit card.

  • Each inquiry can stay on your credit report for up to two years, but it shouldn't affect your credit scores for more than a year. 
  • New accounts opened and inquiries accounts for 10% of your overall score. 
  • Too many inquiries are viewed as a sign of increased risk.

Additionally, a new account will lower the average age of your accounts and can also potentially work against your scores, as well. The length of your credit history, or how long you've been using credit, although not the most important factor, typically accounts for 15% of your total credit score.

How can applying for a credit card help your credit score?

On the flip side, here’s how a new credit card may help your credit score:

If you are carrying a balance, a new credit card can help reduce your overall credit utilization, which is an important factor in your scores.

  • Credit scoring models often consider your credit utilization rate (or the amount owed) when calculating your credit score. You want to keep this to under 30% usage of all available credit as well as at the individual card level. 
    For example: Keep the balance on a $1,000 credit limit card to $300 or less. If you have only one card, with a $1000 credit limit, and have charged $500, you have exceeded the 30% ($300) credit utilization on this card. But if you open another card with a $1000 credit limit, your “total available” credit limit is $2000, and your “total” credit utilization is now 15% ($300/$2000). You can even split that $300 charge across two cards to ensure credit utilization at the card level is less than 30% of its available credit line. 
  • Credit utilization can impact up to 30% of a credit score (which makes it among the more influential factors), depending on the scoring model being used. 
  • A low credit utilization rate shows you're using less of your available credit.

In the long run, if you keep the new card open for several years and make timely payments, it could help to build a better credit history over time.

If you have a limited credit history or credit profile, depending on what you currently have, opening a card in your name can add credit diversity and assist in building credit history and improving your credit score.

Making timely payments is one of the greatest indicators of credit worthiness and impact to a credit score. So, if opening another account just creates a temptation, don’t do it! Your credit score might suffer more than it will improve.

About the author: Michelle Petrowski, CFP®, CDFA®

Michelle Petrowski (formerly) Buonincontri, CFP®, CDFA®, is a personal finance coach, divorce financial strategist and mediator. She is the founder of Being Mindful in Divorce and Being in Abundance, as well as an avid volunteer at Savvy Ladies in NY and Fresh Start Women's Foundation in Phoenix, and she has worked closely with the AZ National Guard. For questions, or a free Financial Next Steps planning consultation, you can email her at Michelle@BeingInAbundance.com.