why is my credit score low after getting a credit card

Question people wonder why is my credit score low after getting a credit card. Answer in our article

Sierra Baldwin: Your credit score can be something that makes things either very easy or very

difficult for you. That’s why so many people try to study up on how their credit score

is calculated and how the money moves they make could affect their score.

I’m Sierra Baldwin and in this video from The Ascent’s Money Lab, we’ll take a look

at exactly what happens, the important factors in your credit score when you apply for a

new credit card. Does opening a new credit card hurt your credit

score? If you’ve done some homework on credit scores, then you know one of the FICO score

factors is new credit, which accounts for 10% of your score. Another 15% comes from

length of credit history, including the age of your newest account. So together, opening

a new credit card would have a negative effect on factors that account for 25% of your FICO score.

Let’s walk through the process of getting

a new credit card to illustrate how this all works. The first step a bank takes when you

apply for a new credit card is to make a hard credit inquiry, which means it takes a look

at your credit report. A hard inquiry will negatively affect the new credit factor of

your FICO score, but the impact will be small if only have one or two credit inquiries on

your report within the past 12 months. After all, it’s okay to apply for a couple of credit

cards per year, but if you’re applying for dozens of them, lenders may think you’re

irresponsible, desperate for credit or both. If the bank approves your credit card application,

you’ll see the account show up the next time you check your credit report. This also negatively

impacts the new credit factor. FICO will ding your score based on how long it’s been since

you opened a new account and how many new accounts you have.

Side note: FICO is unclear on what it considers a new account.

On top of all that, a new credit card will negatively impact the length of credit history

factor of your credit score. Your length of credit history considers the age of your oldest

account, the age of your newest account and the average age of all accounts. The older,

the better. Opening a new card will reduce the age of your lowest account and your average

account age, thereby lowering your credit score. But this misses the big picture.

Based on all that, you might think opening a new credit card is a bad idea. The important

thing to remember is that the two most important factors in your credit score are your payment

history and your credit utilization ratio or the percentage of your available credit

that you’re currently using. Combined they account for 65% of your credit score.

And a new credit card could help improve your credit utilization, which accounts for 30%

of your FICO score. Applying for a new credit card shouldn’t have any impact on your payment

history, because you should be making your payments on-time and in-full every month.

On the other hand, a new card could have a major positive impact on your credit utilization ratio.

This ratio is simply your total outstanding credit card debt divided by your total available credit.

The lower the ratio, the better. As an example, let’s say you only have one

credit card with a limit of $10,000 and a balance of $2,000, your credit utilization

ratio is 20%. But if you apply for a new card and get approved for an additional $10,000

credit line, your credit utilization ratio will drop to 10%. In other words, assuming

your spending habits don’t change, you’ll cut your credit utilization in half

and that can more than offset the negative impact of a hard credit inquiry and a decline in your

length of credit history. The final factor in determining your credit

score is credit mix, which accounts for 10% of your score. If you already have a credit card,

applying for a new credit card shouldn’t have an impact on this factor. If you don’t

already have a credit card, then a new credit card account on your report will have a positive

impact on this factor, further offsetting the negative effects of opening a new account.

Good habits lead to good credit. It can be easy to nitpick and get lost in

all the details of how your credit score is calculated, but here’s the important thing

to remember. FICO rewards responsible credit usage. Yes, applying for a new credit card

could temporarily ding your credit score, but in the long-run it should provide a boost

as long as you use your new credit responsibly. That means, making your payments on time and

staying well below your credit limits. As long as you’re diligent in those two areas,

then getting a new credit card won’t damage your credit score, in fact, it could even

improve your credit score. If you’re thinking of opening a new credit card,

check out our list of the best credit cards on the market at fool.com/creditcards.

The link is in the video description. And if you have your own tips or questions on

getting a credit card or boosting your credit score, leave them in the comments below.

And finally, if you haven’t already, do us a favor and like this video and hit the subscribe button,

that will help us keep making these videos and sharing our best money advice with you.

Thanks for watching and we’ll see you next time on The Ascent’s Money Lab.

 

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