Does a Opening a New Credit Card Lower Your Credit Score?

There are tons of articles on the internet about how opening a new credit card will affect your credit score. (For a few, see TheBalance, nerdwallet, and lots of stuff on credit karma)  They are great resources, and in general, will all tell you about the same thing: As soon as you apply for a new card, it will lower your score in the near term, but once you are approved, your score will bounce back.

I’m here to provide you an actual example, showing you how applying for a new card affected my Transunion score, with screenshots to prove it!  Two months after opening a new credit card account, my credit score had increased 21 points, from 756 to 777.  

Note that the score is specific to my particular details, (how many cards I have, my utilization rate (UR), my total credit limit etc.) so your mileage may vary.   I provide some of these details below, but the screenshots really tell you all you need to know. As it turns out, the credit utilization rate is a key part of this story, so below the credit score screenshot, I’ve included a history of my credit utilization rate as well. Below the images I’ll walk you through what happened at each inflection point (numbered in red).

transunion history

Credit Card Utilization - Credit Karma.clipular

1. Pre Application: Score = 756, UR = 5%

After my December 2016 score was posted, I decided to jump on the Chase Sapphire Reserve bandwagon, back when it was a 100,000 point sign up bonus.  Prior to applying for that card, the last card I applied (and was approved) for was in December 2014.  My score had basically been level between January and December 2016.

2. Post Application: Score = 744, UR = 9%

After applying and being approved for the Chase Sapphire Reserve card (Yippee!), the next credit score showed a 12 point dip, from 756 to 744.  No other cards were applied for but I did have above average spending this month so my utilization rate was a bit higher (note that the Chase Sapphire Reserve credit line was not added prior to this score, so my overall credit limit was the same as in inflection point #1).  This drop is primarily the result of the hard inquiry from my card application but could also be slightly influenced by my higher spending that month.

3. First Active Month: Score = 789, UR = 0%

This score update is after I activated my new card and began to use it for purchases. The new card came with a $20,000 credit limit, so I’m assuming the bump in my credit score was the fact that my credit limit went from $95,000 to $115,000. In addition to the an increased overall credit limit, I had below average spending this month (less than 0.5% UR) which could have also influenced the score.

4. Second Active Month: Score = 777, UR = 3%

This score reflects normalized spending and my long term credit score increase (was 776 as of April 2017).  Prior to the new card, my average utilization rate was approximately $4,000/$95,000 or 4.2%.  With the new card and the same amount of spending, my new utilization rate was $4,000/$115,000 or 3.5%.  You can see how just the change in overall credit limit brought down my utilization rate and increased my credit score.

Summary

In the long run, what I found was that in my case (7 open accounts and 2 closed accounts) opening a new credit card actually increased my credit score.  This is best exemplified by looking at my score prior to any application (756) and then after everything had normalized (777).  Typically, your score will drop immediately after you apply for the card (inflection point #2), but then rebound higher than your original score because of the decreased overall utilization rate (inflection point #3).  In the long run, the lowered utilization rate results in a higher credit score than before.

Credit Utilization and Your Credit Score

One of my favorite things about credit cards is that I get 30 days to make a payment after my statement becomes available.  I love waiting 25 days to pay – not because I don’t have the money, but because I consider it a 25 day interest free loan. Instead of paying immediately, the money sits in my savings account and earns interest.  I am fully aware that the interest I am earning is pretty insignificant (we are talking a few dollars over the course of a year), but its free money and it makes me happy.

The only drawback to doing this is that my credit utilization rate will be higher, and if that rate is too high it can affect my credit score.  A credit utilization rate is simply the ratio of money owed vs. available credit.  Here’s an example:  Lets say I spend about $1,000 a month on my credit card which has a credit limit of $8,000.  At the end of May I will have a balance of  $1,000.    If I pay my statement immediately, I will start June with a $0 balance.  The largest balance I will ever have on my card is $1,000, meaning at most I will be using 12.5% (1,000/8,000) of my credit limit.  (Credit utilization rate is 12.5%)  If, however, I wait 30 days to pay off my statement, I will start June with a $1,000 balance and by the end of June my balance will be close to $2,000.  My payment of $1,000 for May’s statement at the end of June will be on time, but at the end of every month I will be using 25% (2,000/8,000) of my credit limit.  (Credit utilization rate is 25%)  I wasn’t sure how much was too much in terms of credit utilization so I did a little research.

How does credit utilization affect my credit score?  As most people will correctly tell you, the number one rule of establishing a good credit score is to make your payments on time.  Unfortunately, paying your bills on time accounts for only 35% of your credit score.  According to most sources (including the Consumer Federation of America, and Bankrate.com) credit scores are comprised of five basic categories:

  • Payment history (35%)
  • Money owed vs. available credit (30%)
  • Length of credit history (15%)
  • Recent credit applications (10%)
  • Mix of credit types and other factors (10%)
The second most important category is money owed vs. available credit, or credit utilization.   According to most financial experts, the lower your credit utilization the better.  The following chart from Credit Karma is an excellent depiction of this trend and is the best explanation I could find on what is the most advantageous credit utilization percent.  As you can see from the graphic, your best bet is to use less than 10% of your credit limit.  It is important not to infer that credit utilization is the only driver for credit scores.  Check out the original article for more details.

Should I be measuring credit utilization for each card or for total available credit?   I have one other card with a $4,000 credit limit that I rarely ever use (because I don’t get cash back).  If I use that card in my calculations, my total credit limit is $12,000.  At most I will have a 16.6% (2,000/12,000) credit utilization rate, which sounds much better than a 25% utilization rate.  So which is it?

According to this article from creditcards.com, “the [credit score] scoring formula also looks at utilization on the individual cards that make up the overall utilization percentage.”  So while the most important thing is to keep your total credit utilization rate below 30%, you should also not ignore high utilization rates on each of your cards.  By spreading around your spending on multiple cards, you can also avoid having your unused card have an unexpected credit limit decrease.  So for now, it looks like I’ll start paying my bills sooner until I can get a credit limit increase…