There's nothing wrong with changing -- or adding to -- your plastic from time to time. In fact, it's a good idea to keep an eye on your wallet to make sure you have credit cards most relevant to your needs. You should align the ways in which you can earn miles, points and cash back with your personal spending patterns, and make sure the rewards you can redeem are the ones that most enhance your particular lifestyle. And there may be times in your life when you wish to roll forward card balances, and then you should normally have low-interest cards to keep down the cost of that borrowing.
It's true that applying for credit cards can -- and generally does -- have an impact on your credit score. However, if you follow some simple rules, you should be able to refresh your plastic without causing a big hit to your score.
A small hit -- just for applying
You might see a small reduction in your score when you apply for any credit. However, in a 2012 white paper, VantageScore suggests that, at least for its algorithm, this should generally be both insignificant (usually) and brief. Submitting an application could see you lose between 10 and 20 points, plus up to five more points when an account is actually opened. Not to worry. VantageScore says that -- providing you manage your new account well and don't mess up in other ways -- your score should be back to where it started within three months or so, although it may take longer with other scoring systems.
That's unlikely to trouble most people. However, suppose you were about to make a big application -- for a mortgage, say, or an auto loan. If your score is currently, for instance, 710, a 25-point drop might take you below a threshold (700 in this case) into a different category of borrower. And that might see your lender increase the rate you're offered, or even decline you. That's why many experts warn against trying to open new accounts six months or even a year before applying for an important loan.
By the way, you may have read that credit scoring systems allow you to shop around for the best deals by counting as just one single application all the ones for similar loans you make within a focused period. That's true for most types of account. However, this isn't the case for credit cards.
"When you apply for a credit card you are either approved, or not," says John Ulzheimer, president of consumer education at CreditSesame.com. "If you are approved, you immediately have access to the credit line even if you have no intention of ever using it. Applying for a credit card simply to see what kind of deal you'll get isn't wise because it, rightly, gives the impression that you have opened multiple accounts in a short period of time."
A bigger, longer-term hit
So you don't want to shop around for credit cards using applications. But that doesn't explain some advice from Anthony A. Sprauve, a senior consumer credit specialist with FICO.
"You only want to open new credit when necessary," he says.
Sprauve ranks that among his four golden rules for improving your credit score. Why? Because the average age of the accounts on your credit report (called "time in file" in the industry's jargon) plays a significant role in determining your score.
In fact, FICO reckons that the average age of credit accounts on the reports of those with really high scores is 11 years -- four years older than the average for consumers with less-impressive scores. Ulzheimer calculates that time in file is actually 150 percent more important to your credit score than inquiries.
"If you open one or two new accounts every year then you're always going to have a 'young' credit report and won't ever earn all of the points in that scoring category," Ulzheimer says. "If you open new accounts less frequently then you give your credit report time to age. That will help your scores."
Rules when making credit card applications
So, to sum up, here are the rules you need to follow when applying for plastic:
- Don't apply for cards -- or anything else -- for six months before pursuing an important loan. If you really want to be safe, you could make that a year.
- Don't use applications to shop around for plastic. Seek out the best credit cards for your needs, pick your favorite, and apply only for that one.
- Don't apply too often. Every successful application is going to reduce the average age of the accounts on your credit report.
- Don't apply unless you need to. And, even then, think laterally. FICO suggests that, if you need access to more credit, you should call your existing card issuers and ask them to increase your limits. Having said that, using too much (more than 30 percent) of your available credit is likely to hurt your score at least as much as the average age of your accounts. So, if you must have more credit, be pragmatic.
None of this means you can't apply for new credit cards from time to time. Just be aware of the possible impact on your score when you're doing so. And don't forget: a free credit score service can help you keep track of how your credit's doing -- and allow you to manage it proactively.
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