Before applying for a new credit card, you have to ask yourself a few questions, the most important being, “Why do I need this?”
As with anything, there are some exceptions, like if you’re financing a large purchase, using credit in an emergency, or aiming to build credit responsibly (ideally by charging no more than you can pay in full each month). But for the most part, if you can’t give a good answer to this question, it’s time to stop filling out the application. Do not pass “Go.” Do not collect your $200 sign-up bonus.
Assuming you have a worthwhile reason for getting a new credit card and will qualify for one, there are still a few things to consider, like how the new card will impact your credit.
Applying for new credit (whether that’s a credit card or loan) will result in a hard inquiry on your credit report, and hard inquiries have a small, negative impact on your credit score for 12 months after they’re made. One inquiry shouldn’t be a significant hit on your score, but applying for a lot of credit in a short period of time could shave a lot off your score, so apply only when you need it.
Say you have a personal loan or student loan on your credit report but no credit cards. Adding a credit card will improve your account mix, which makes up a small portion of your credit score. It can be tricky to get approved for that first card, so you may want to start with a secured card, but once you’ve established responsible behavior with that card, you will have improved your credit and paved the way to better credit products.
One of the fastest ways a new credit card will help your score is by increasing your total available credit limit. Say you have one card with a $2,000 limit, and you’re using about $500 of that limit. That’s a 25% credit utilization rate, which is good, but it would be better if it were below 10%. Then you get a new credit card, and it comes with a $5,000 limit. That puts your utilization below 10% with a little room to spare ($500 balance / $7,000 total limit).
The thing to pay attention to here is to not abuse the higher credit limit. It’s definitely tempting to spend when you have $7,000 of available credit, but most experts recommend keeping your utilization below 30%, or $2,100 in this case. Below 10% is the best, and that’s a spending limit of $700.
Increasing your credit limit with an additional card will outweigh the ding your credit score feels as a result of the inquiry, as long as you minimize your spending.
Over time, the best thing a credit card can do for you is establish a record of strong payment behavior. At the same time, a pattern of missed or late credit card payments will hurt your credit score, so you make a credit card what you will: A means for growth or a destructive tool.
There are tools that can help you determine a good path toward better credit. One free tool, Credit.com’s Credit Report Card, for example, can show you if there’s room for improvement in your debt use or payment history categories. You’ll want to look at your existing debt before turning to a new credit card as the way to improve your scores. You may want to reduce your spending and work on making timely payments on your existing debt to help raise your credit scores before applying for additional credit. Like all financial tools, credit cards can be really helpful, but they can also wreak havoc on your finances if you’re not careful.
More on Credit Reports and Credit Scores:
- What’s a Good Credit Score?
- How to Get Your Free Annual Credit Report
- How Do I Dispute an Error on My Credit Report?
- What’s a Bad Credit Score?
- How Credit Impacts Your Day-to-Day Life