How Does Applying For a Credit Card Hurt Me?

Manshu Verma asked:

How does applying for a credit card hurt my credit score?

Every time you apply for a credit card, the credit card company makes an inquiry into your credit report. These are also known as hard pulls. Each of these credit inquiries or hard pulls, take away around 5 points from your credit score.

The rationale behind taking away points from your credit score when you apply for credit, is that, it is harder to control multiple lines of credit when compared to just a few. It also shows a tendency that leans towards getting excessive credit and then getting into a spending spiral, which may become difficult for you to get out of and as a result your chances of default become high.

These inquiries show on your credit report for a period of one to two years, but the dent in score itself will be rectified in about a couple of months, if you do not abuse your newly available credit.

If your credit application gets approved, then your score will rise fairly quickly because the additional line of credit will give you a boost. Along with this, your ‘debt is to available credit’ ratio will also improve and that will help boost your score too.

Be aware of the credit application spiral

The people who are worse hit are the people whose credit application gets rejected. When their application gets rejected, their score goes down. However, since their application has been rejected, they apply again thereby reducing their score further and chances are that they will get rejected once again. This is a vicious circle and if you get into this kind of thing four or five times, then your credit score takes a bigger hit.

So be careful, and next time you are tempted to apply for that store credit card that will give you $10 off on a new shirt, think twice!