Getting a new credit card is considered a wise decision for most people these days. It not only helps manage expenses but also offers benefits like rewards, offers, and cashback. Most importantly, it can significantly improve your credit score, provided it’s managed correctly. A new card can have both positive and negative effects on your score. Let’s understand how a new credit card impacts your credit profile.
The Immediate Impact of a Hard Inquiry
When you apply for a new credit card, the bank or credit card company checks your credit profile. This process is called a hard inquiry. A slight drop in your score is normal. However, this drop is very minor and temporary. However, applying for multiple cards in a short period of time indicates that you are trying to take on more debt, which can have a significant negative impact on your score.
Opportunity to Improve Credit Utilization Ratio
The credit utilization ratio plays a crucial role in the credit scoring model. It indicates how much of your total limit you are using. Getting a new card increases your total credit limit. If you keep your spending the same, the utilization ratio decreases, helping to improve your credit score. For example, if your total limit is ₹5,000 and you’re using ₹2,500, the utilization ratio is 50 percent. Getting a new card increases the limit to ₹10,000, and the ratio drops to 25 percent. This directly strengthens your score.
Impact on Average Age of Credit History
The age of accounts also plays a role in your credit score. Adding a new card reduces the average age of accounts, which may have a slight negative impact for a short time. But if you have a good payment record and pay your bills on time, this effect gradually fades, and your score stabilizes and begins to rise again.
Opportunity to Strengthen Your Credit Mix
Credit scoring systems give you a better rating if you have a variety of credit. If you previously had only a loan or a single card, adding a new credit card strengthens your credit mix. This helps improve your score and makes your financial profile appear more balanced.
Helps Build a Better Payment History
Payment history is the biggest component of your credit score. A new card allows you to develop a new habit of making timely payments. Regularly making all payments on time consistently improves your score. However, a single mistake, such as a late payment, can quickly damage your score. Therefore, caution in card management is essential.
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Responsibilities of Multiple Credit Cards
Having multiple cards is beneficial, but managing them can be challenging. Keeping track of different due dates and bills can sometimes be difficult. Missing even one card payment can impact your overall credit score. Therefore, setting reminders or using auto-payments is considered the best approach.