Short answer: yes. Long answer: it depends.

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If your first thought when applying for a new credit card is whether or not it will impact your credit score, kudos for being a conscientious consumer.

Credit scores have been steadily increasing since 2010, and as of 2018, the average American has a respectable FICO® Score of 695. If you want an excellent credit score, you’re going to have to do more than your average consumer. Even if you’re happy with your current score, understand that even one misstep can cost you.

While it’s true that credit card applications can, and often do, affect your credit score, it’s not true that they’re always bad for your credit. Let’s look at how your credit score is determined and why credit card applications can affect it positively, negatively, and sometimes, not at all.

How your credit score is determined

The details of how it’s calculated aren’t publicly available, but credit bureaus do release the five factors that determine your credit score. The following list shows you what goes into calculating your credit score and how much weight each component holds.

• Payment history: 35%

• Amounts owed: 30%

• Length of history: 15%

• New credit: 10%

• Types of credit used: 10%
  
  

Your payment history, the most important factor, is mostly determined by whether or not you have any late payments, so new credit card applications don’t directly affect it. However, the other four factors can be affected by new credit card applications.

How applying for a new credit card affects your credit score

Applying for a new credit card results in a “hard pull” on your credit report, also known as a hard inquiry. Inquiries are simply records on your credit history that show that your credit report was accessed by a potential lender. These fall under the “new credit” portion of your credit score.

This, in and of itself, is not necessarily a bad thing. According to FICO, many people see absolutely no change in their credit score as a result of one credit card application. Those who do see changes typically only see a drop of less than 5 points, and that decrease is temporary.

The reason you might see a slight drop in your credit score after a credit card application is that having too many recent inquiries on your credit report indicates that you’ve been applying for lots of credit from lots of different lenders, which demonstrates a potential risk. So, while one application isn’t anything to worry about, submitting five credit card applications in a short time span is.

If you have a low credit score or a short credit history, the effect that new inquiries have on your credit history may be exaggerated. For example, someone with only one account on their credit history and a two-year average age of accounts will likely experience a bigger drop in their credit score after new credit card applications than someone with five accounts on their credit history and a 15-year average age of accounts.

Even still, having few accounts and a short credit history is a reason to apply for a new credit card, not the opposite. The only way to boost your score and make yourself more impervious to short-term fluctuations in credit is by building it.

Either way, the effect that credit card applications have on your credit score is short-term. Your credit score will start to recover after three months, and the inquiry will cease to affect your score completely after 12 months. And according to Experian, an inquiry “will never be the reason your application is declined” -- they only become a significant problem when your score is already in jeopardy for other, more important reasons.

Rejected vs. approved credit card applications and how they affect your score differently

When an inquiry shows up on your credit report, it does not show whether or not the application was approved or rejected. Therefore, having your credit card application rejected doesn’t directly hurt your credit score.

That being said, it’s always better for your credit score to receive an approval, and opening a new credit card can easily offset any small decrease in your credit score. That’s because 30% of your credit score is determined by your “amounts owed,” and a big factor in calculating that component is your credit utilization ratio, or the rate of debt to available credit you hold. The lower, the better.

For example, if you have $2,000 in credit card debt and the sum of your credit limits across all of your credit cards is $4,000, your credit utilization ratio is 50%. If you have $2,000 in credit card debt but your aggregate credit limit is $10,000, your credit utilization ratio is 20%. Based off this factor alone, the person with the high limit credit cards is more likely to have a good credit score, even though both are paying off the same amount of debt.

This means that opening a new credit card can actually improve your credit score. If it lowers your credit utilization ratio drastically, it’s likely to bump your credit score up more than a new inquiry could drag it down.

There’s no reason to worry about one or two inquiries showing up on your credit report. Credit cards can earn you valuable travel rewards, save you hundreds in cash back, and even help you pay off debt at a 0% interest rate, as long as you use them responsibly.

The best way to keep an excellent credit score is to focus on demonstrating a solid payment history and keeping your credit utilization and amounts owed down. Don’t apply for credit cards you don’t need, and pay your balance off on time and in full every month, and you’ll be fine.

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