Does Applying for Credit Card Hurt Credit

A credit card allows you to borrow finances from your issuer, who could be a bank or credit union. Some financial technology companies also issue credit cards whereby you have to apply online and get them at your place. Even banks have begun embracing online card applications that receive your card at your physical address. Therefore, you do not need to visit a branch to get a card. But does applying for credit card hurt credit?

We shall check on that later to see if there is any negative impact on your overall scores when applying for new credit. Credit scores are significant when getting lines of credit and loans. They express your creditworthiness, giving lenders a general view of your ability to repay loans. Having many scores means that you have been repaying your loans and lines of credit correctly.

Usually, when you get a loan, your bank or any other issuer gathers data about your repayment patterns and reports it to the credit bureaus. Also, financial companies report how you use your credit card, including your payment patterns, the percentage of your credit limit you use, and whether you keep your card active, among other details. The payment data accounts for a large percentage of your overall credit scores.

What are credit bureaus?

Credit bureaus are bodies entrusted by the federal government to collect and keep information concerning borrowers. The bodies use the various information given to them by financial companies to calculate FICO/credit scores and come up with credit reports.

There are three credit bureaus which include TransUnion, Experian, and Equifax. The institutions are entirely independent of each other as they receive borrowers’ information independently.

How do you get a credit card?

does applying for credit card hurt credit

A credit card is easy to get from banks and credit unions if you meet the requirements. The first requirement for getting credit is at least 18 years of age. Financial institutions do not allow underage persons to get credit cards. However, they may get debit cards and use them under the watch of their parents or guardians.

Secondly, you must understand why you need a credit card. If you want a card to borrow finances when you have no money left, you can consider an unsecured credit card. However, suppose you want to build scores from a bad credit perspective or scratch. In that case, you can consider applying for secured credit cards.

After knowing the type of credit card you want, you can proceed to apply. It is also essential to check on the best card issuer based on various factors such as fees, credit limit, interest rates, late payment fees, etc. Most financial companies allow you to apply for your card online or at physical branches. When applying online, it is convenient because you can do the process from anywhere and anytime.

In most cases, it is straightforward to get a card at a bank or any other relevant financial institution if you have an existing account with them. Since they have your details, such as your Social Security Number, identification document, phone number, and the rest, it is easy to apply for a credit card. 

Another vital thing to check is the credit scores needed for the card application. Even though you can get instant credit card approval for bad credit with no deposit, good credit cards usually require high FICO scores so that you can enjoy their services.

Does applying for credit card hurt credit

Financial companies usually make a hard inquiry when applying for a credit card. That is when you apply for unsecured credit cards. The hard inquiry is to check if you are eligible to get a particular credit card. They usually get these details from the credit bureaus.

Once they make a hard inquiry on your scores, you may experience a drop in your scores. However, the drop is temporary and returns to normal after some time. Suppose you apply for several credit cards within a short period. That means there will be several hard inquiries that can lead to dropping in scores in a big way.

However, when you apply for a secured credit card, there is no effect on your scores since financial companies do not contact a hard inquiry. Furthermore, you can get a secured credit card for rebuilding credit whereby you deposit a security deposit and thus no need to check your scores.

How do I check my scores?

It is essential to know your scores, especially if you want to apply for a credit card. You can get your scores from the credit bureaus, although you have to pay a small fee for the service. You need to visit the credit bureau of your choice, create an account, and make your payment to get your scores.

However, you can get FICO scores free from your bank or credit union. If you have ever got a loan from a particular financial company, they have your details, including your scores. You can get them for free and plan on the best credit card to apply for. Another place you can get free scores is CreditKarma. The site allows you to get your scores when you provide your details.

How do credit bureaus calculate FICO scores?

Credit bureaus use various pieces of information to calculate your scores. They include the following.

i) The payment history

How you have been repaying your loans and lines of credit is very important when it comes to credit score calculation. Payment history covers around 35% of your overall credit scores. That is due to the heavyweight the part covers, as every financial company would like to see how you have been making your payments. After all, who would like to give someone a loan if they have not been repaying their previous debts well?

ii) The amount you owe

The portion contributes up to 30% of your total scores. If you spend too much of your credit limit, then it means that financial companies owe you a lot of money. That can be dangerous to your credit. However, if you have several credit cards and have spent a little on each one, then that does not mean you owe a lot of money. The amount you owe is checked per credit card.  

iii) The length of your credit history

The time you have used loans and credit cards is also a significant determinant of your scores. If you have utilized credit for a long time, you will have good scores. That is possible if you use your cards well. However, you might have a long history but did not make payments well. In such a case, you are likely going to have poor scores. The length of your credit history occupies 15% of your score.

iv) Credit mix

If you mix your credit, you will have many institutions reporting your repayments to the credit bureaus. Therefore, you will have some scores from that. You can get personal loans, credit cards, and auto loans. Getting all types of credits is not a must to improve your scores. However, getting a few of them helps. The credit mix accounts for 10% of the overall scoring.

v) New credit

New credit has some adverse effects on your credit scores. If you apply for a loan or line of credit today, the concerned issuer will contact a credit check. That will lower your scores a little bit. If you apply for several credits within a short time, you can see what will happen. There will be a significant drop in your overall scores. New credit accounts for up to 10% of your credit scores.

How do I build credit?

There are various ways you can build credit to qualify for better loans and lines of credit. They include the following.

1) Get a secured credit card

A secured credit card becomes handy if you build your scores from scratch. You only need to make a security deposit to the concerned institutions to get one, and you are good to go. Your borrowing limit depends on the security deposit you make. After several months, usually six, you will see an increase in your overall scores.

2) Clear your debts

If you have any debts with a financial company, you have to clear them if you want to see a change in your overall scoring. Debts can drag you behind in a big way. You probably have bad scores because defaulting details exist in your credit report.

3) Become an authorized user

You can request someone with good scores to allow you to become part of the card user. The person can be your parent, guardian, or sibling. When you use their cards, your scores shoot within a few months.

Bottom line

Credit cards allow you to borrow finances from a bank or any other relevant financial company. The card allows you to buy goods and services from various retailers online or in physical stores. You can get a credit card online or at a physical branch, whereby card issuers check on your scores when applying for unsecured credit cards. The secured ones do not require any credit check since you already have a security deposit.