Impact on Credit Score When Opening a New Credit Card
A person's credit score is an estimate, made by credit reporting agencies, of the likelihood that he will pay back a new loan on time and in full. The information used to determine a person's credit score is reported by lenders and collected in a credit report. Each time a person takes out a new loan or line of credit -- such as when opening a new credit card -- this information is entered in the credit report and the person's score is affected.
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New Credit Cards
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When a person takes out a credit card, she is essentially opening a line of credit with a credit card company. After the card is issued, the company that issued the card will report to credit reporting agencies that it has offered the borrower a new line of credit. Depending on a number of factors, including the person's previous credit history and the size of the line of credit, the borrower's credit score will be affected in different ways.
Short-Term Effects
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In the short term, a new credit card can either help or hurt a person's credit score. Credit scores are determined using complex secret formulas, the precise nature of which varies between credit reporting agencies. Generally, the higher a person's debt-to-available-credit ratio, the lower the person's score. Taking out a new credit card, which makes more credit available, can raise this score. However, according the Fair Isaac Corp., the company that helped invent the modern credit score, taking out too many credit cards can cause a person's score to drop.
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Long-Term Effects
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How a new credit card will affect a person in the long term depends on how the borrower uses it. If a borrower quickly racks up a large amount of debt on a credit card, his debt-to-available-credit ratio will rise and his score will be lowered. However, if he makes his payments on time and in full, the borrower can help establish a good credit history, leading to a better score.
Credit Checks
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When a lender checks a person's credit after she has filled out a loan application, such as for a new credit card, her credit score will generally drop a few points. This is because credit reporting agencies take these kinds of credit checks as a sign that the person is getting ready to take on more debt. This suggests that she may be at a higher risk of defaulting on current loans; therefore, her score is lowered.
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