If you go to a bank to apply for a loan, the first thing that is checked is your credit/ CIBIL score. CIBIL score is vital when determining whether you can obtain a personal loan, housing loan, or credit card.
When you apply for a new credit card, consider how the latest credit card will affect your credit score. This article helps you take a closer look at how the new credit card may potentially impact you:
Hard inquiries
When you request a new credit card, the company conducts a hard inquiry on your credit report. Each inquiry can lower your credit score by a few points for 12 to 24 months. While this change is generally small, multiple inquiries in a short time signal to lenders that you are at a higher credit risk, which can lower your credit score.
Credit utilisation ratio
Your utilisation ratio is the amount of credit you use from the available credit limit. It plays a pivotal role in how your credit score is determined. When you open a new credit card, your overall available credit limit increases.
This helps you decrease your utilisation ratio if your spending is consistent. A lower utilisation ratio is beneficial for your credit score. However, if you spend more on the new card, your utilisation ratio can increase, negatively affecting your CIBIL score.
Credit mix and length of credit history
Having more than one type of credit, such as house mortgage and vehicle loans and revolving loans, such as credit cards, will benefit your credit score. Acquiring a new credit card will enhance your credit mix, boosting your score.
A new credit card also lowers your accounts’ average age, which can lower your score temporarily. The length of your credit history accounts for about 15% of your credit score, so the impact of a new card diminishes over time as the account grows older.
Payment behaviour
The most crucial factor in determining your credit score is your payment history, which represents around 35% of the score. By keeping your new credit card in good standing and paying on time, your credit score gradually improves. Conversely, late payments on the new card can cause severe drops in your score and permanent damage to your credit.
Advantages of credit cards
While credit cards do have some negative short-term effects, they also have benefits that can help enhance your credit score in the long run. These positive effects include establishing a good credit history through consistent, timely bill payments and earning rewards and benefits while responsibly using your credit cards and managing your finances. Understanding the benefits of credit card usage can encourage better financial habits and help you unlock valuable rewards and financial flexibility.
Strategies to minimise negative impacts
To ensure that opening a new credit card will not harm your credit score, you can use the following methods:
- Apply for a new credit only when essential.
- Monitor your usage on the new card to ensure you do not increase your credit utilisation ratio.
- Set up automatic payments or reminders, so you pay your bills on time.
- Examine your credit report regularly for updates, and if you locate any errors or suspicious activities, report them instantly.
Conclusion
Having a new credit card can have adverse impacts in the short run but positive impacts on your credit score overall. By understanding how credit scores are calculated and learning how to use a credit card, you can utilise a new credit card to build your credit score.
Always consider the pros and cons of credit cards to make wise decisions that suit your financial profile.
Also Read: Effective Ways to Build Your Credit Score