It isn’t always easy to be approved for a credit card, particularly if you don’t have excellent credit. You may think it makes sense to apply for several cards at the same time — after all, the more you apply for, the more likely it is you’ll be accepted by one of them.
Right?
Not so fast. Applying for multiple cards at once also means multiple hard inquiries on your credit report, which can ding your credit score more than when you apply for only one card at a time. There are other risks as well, says Matt Schulz, a chief credit analyst with LendingTree, which owns MagnifyMoney.
“Applying for too many cards at one time can raise red flags with lenders and make you look desperate,” he said.
However, he added, applying for new credit is hardly all bad, provided you’re approved for the card. “The positive effect of that new card on your credit utilization will often override any negative caused by the hard inquiry,” he said.
Below we’ll explore exactly how applying for multiple credit cards may affect your credit score, for better or worse.
What happens to your credit score when you apply for several cards at once?
Your FICO score is the one most often used by lenders, and it comprises five key factors. Find out which of these will be most affected if you apply for several credit cards at once.
Payment history. The most important element of your FICO score is payment history, which comprises 35% of your total score. Making regular, on-time payments on all your loans, from credit cards to mortgages, is how you maintain a healthy credit history and score. Applying for several credit cards at once doesn’t have an immediate effect on your payment history — however, if you have several credit cards and have a hard time juggling multiple payment due dates, which causes you to eventually miss one or two payments, your credit score will take a nosedive.
Credit utilization. The next most important part of your credit score, at 30%, is your credit utilization ratio, which is the percentage of your available credit that’s been borrowed. This is where applying for multiple credit cards can have a positive effect on your credit score over time. Why? Because when you add a new line of credit, your overall utilization ratio will decrease if you are carrying a balance on any other cards. Utilization is measured by individual cards as well as across all your cards. For example, let’s say you have just one credit card with a limit of $5,000, and you charge around $2,000 a month. That would put your utilization ratio at 40%. It’s generally recommended that you keep your utilization ratio below 30% — and the lower, the better. Now let’s say you apply for a new credit card with a $15,000 credit limit, and now your overall credit limit across both cards is now $20,000. If you keep your credit card charges at $2,000 per month, your utilization rate will drop to a low 10%. That’s good news for your credit score!
Length of credit history, at 15%, is the third-most important aspect of your FICO score. The longer you’ve been using credit responsibly, the better, as you’ve had more time to prove your creditworthiness to lenders. Obtaining several new credit cards could put a dent in this part of your score, as the length of your credit history is an average age across all your accounts. So, if you have one card that’s five years old and two others that are brand new, your overall credit history will be reduced. However, as time goes on, if you use the new cards wisely, your score should rise.
New credit makes up 10% of your overall score. Opening up multiple new lines of credit at once can be a negative in this category, given the multiple hard inquiries and the potential of seeming “desperate” to some lenders. “It’s fine to open one or two cards over the course of a year, but doing so in a single week might not be the best idea,” Schulz said.
Credit mix. The final 10% of your FICO score comes from your credit mix. Lenders like to see that you can handle several different kinds of credit, from installment loans (such as mortgage and auto loans) to revolving credit, such as credit cards. If you only have one kind of loan — say, an auto loan — and then apply for and obtain a couple of credit cards, this could be good for your credit mix.
How credit card rejections impact your score
Now, let’s say you apply for multiple credit cards — and are rejected for all of them. Will this hurt your score even more than the hard inquiries on your account? Actually — no. While getting rejected might feel bad, and it will be harder to build up a credit history if you have trouble getting credit in the first place, the good news is that the actual rejection is a non-factor for your score, as it’s not noted in your credit report. The good news about hard inquiries is that they are temporary. They stay on your credit report for two years, but their impact fades after one year. One hard inquiry can knock your score down anywhere from 5 to 10 points, so the lower your score is now, the harder it will fall compared to someone with an excellent score who can afford a minor dip.
How many credit cards should you have?
You may wonder if there is an ideal number of credit cards to have. The answer to that is — not really. The number of cards you should have depends on your individual situation and how responsible you are in your overall budgeting and spending habits. Some people can manage 10 cards at once, while for others, two cards are enough.
“If you don’t think you can handle getting another credit card, don’t get it,” Schulz advised. “The stakes are too high.”
The main items to remember, no matter how many cards you have, are to always make on-time payments and to keep your utilization ratio as low as possible. So, if you do have fewer cards and a lower credit limit, manage your cards accordingly.
Tips to avoid the credit debt trap
So what are the best ways to manage your credit cards? Here are three tips to help you avoid the scourge of debt.
This one may sound simple, but it’s crucial — never charge what you can’t afford to pay off promptly. Your cards should be used for convenience and credit building, not to buy luxury items you can’t pay for in cash.
Along with never charging what you cannot afford, you shouldn’t make just minimum payments on your card. It will take you a much longer time to pay off your debt this way, and you’ll end up paying far more for the items you charged than what they were originally worth due to the interest that will accrue (an exception is if you are still in the promotional period for a 0% card). The best plan is to pay off your entire credit card balance every month. If this is impossible to do, you should at least pay a good amount over the required minimum payment.
One way to avoid having to rely on your credit card for unplanned purchases is to build an emergency fund. This may sound daunting, but even small amounts taken from your paycheck and funneled into a special bank account can add up over time. If you find yourself in a situation where you have an unexpected expense — say, a major car repair — having the cash-on-hand to pay for it means you can either pay the expense off immediately or avoid using your card for it altogether.
If you do find yourself in debt trouble, you may want to consider a debt-relief program — but be sure to understand what you’re getting into before you sign up for one.
Bottom line
Applying for multiple credit cards can help your credit score, but if you apply for them all at once, be prepared to watch your score drop with the multiple hard inquiries and shortened credit history (if you happen to be approved for them all). Your score will eventually recover, as long as you make payments on time and keep your utilization low. However, if you’re going to be in the market for a mortgage or car loan in the near future, you may want to protect your credit score and hold off on multiple applications. The best approach is to spread out those card applications over time to minimize any major score impact.
