The Double Whammy From a New Credit Card

We have heard that applying for credit can impact our credit score. One or two inquiries may have little effect on the numbers, but having several in a year can take its toll. Those applications can have a greater negative effect if they are for credit card accounts. The difference between a credit card and a home or auto loan is how many accounts will be opened and how inquiries are counted.

For instance, you may apply to several banks or credit unions in order to secure the best auto loan. All of the inquiries in a 30 day window will be lumped together and counted as one. (Just a note that this time frame may be as short as 14 days or as long as 45 days depending on the credit score model used by the lender.)

You will be able to see each lender that pulled your report, but the inquiries will not have the same impact. When you apply for credit cards or unsecured loans, each application is counted separately. The more inquiries you have, the worse it is for your credit.

The Second Hit

The extra ding from credit card applications comes from opening new accounts. With a car or home loan, you are only opening one account (maybe two if you have a second mortgage). Unsecured applications can result in a few, new open accounts.

Why does it matter how many new accounts you have? It impacts the average length of time you have used credit. The higher your average length of time using credit (successfully of course), the better it is for your credit score.

To help explain this, here is a simplified example of how this could impact a credit score. Imagine that you have three credit based accounts:

Account 1 – 10 years old

Account 2 - 8 years old

Account 3 – is brand new

Your average length of history is six years (10 + 8 + 0 = 18. 18/3 accounts = 6 years).

Before the new account, the average length was nine years. You lost three years of time, which may equate to losing credit score points.

The “point” is that your score can be hurt by the number of inquiries and because the average length of your credit history is shortened. Together, those pieces of a credit report make up 20% of a credit score.

The moral is, take advantage of shopping for the best interest rates on your home loan or auto. When it comes to credit cards, do your homework before you make the application. There are great sites like Bankrate.com and Nerdwallet.com that can help you find credit card offers based on your credit rating.

And be frugal with your card applications. If you are turned down, wait six-to-twelve months before you make another credit card application.

Note: Everything we are discussing here is based on a FICO credit scoring model. This model is widely used in mort-gage and auto lending at this time.

Published Feb 9, 2015.