I know credit card companies are smart, but can I be smarter?

May 1, 2012 5:58 PM

So I'm considering applying for a new credit card for the sign-up promotion. I know this is generally not a great policy. but how bad of an idea is it really in terms of credit score?

My question: In general, for someone with good credit history who trusts themselves not to abuse credit, how much does it affect your credit score to apply for new lines of credit? Does it ever make financial sense in the long run to apply for credit cards based on promotions or is it just a gimmick that will come back to get you later on?

My special snowflake situation: I've had credit card A for 5 years, I got it when I was 19 I think. I currently have two credit cards. I got credit card B about a year ago. I never carry a balance on either of them (well, I did on credit card B for a little while because it had a 0% APR for the first year and I moved cross-country, which turned out to be an expensive proposition. But I've never paid interest on either of them.) I don't really use credit card B at this point because the super-duper introductory rewards are done and I have no real need for two credit cards. Total credit limit on the two of them is ~5k I think. Now, I am thinking of applying for a new credit card because of a promotion on it that would let me fly home and visit my family this summer and am trying to figure out if it's worth it. And in general, I am curious at what point shopping around for credit cards starts to be a bad deal.

My special snowflake addendum: I know that credit cards are bad news in a lot of situations. I would not be considering this if I had ever had any trouble with credit. However, I am the cheapest and most debt-phobic person I know. I have lived comfortably and saved money under the poverty line. The idea of paying interest on a credit card balance makes me ill. I have never put more on a credit card than I had cash in the bank, and the idea of doing so makes me feel a little panicky. It's possible that I'll end up in debt at some point in my life, but if that happens it will be from medical bills or something like that, not from wild shopping sprees after my credit limit was raised. Just trust me on this, please.

Bonus question: If I basically never use it, should I cancel credit card B?

posted by geegollygosh to Work & Money (6 answers total)

I do this pretty frequently (every few months or so). It doesn't make much of a dent in my credit score at all, perhaps less than ten points on an application. I've copied the answer from the myFico FAQ on credit inquiries below and bolded a couple of relevant parts:

How much will credit inquiries affect my score?
The impact from applying for credit will vary from person to person based on their unique credit histories. In general, credit inquiries have a small impact on one's FICO score. For most people, one additional credit inquiry will take less than five points off their FICO score. For perspective, the full range for FICO scores is 300-850. Inquiries can have a greater impact if you have few accounts or a short credit history. Large numbers of inquiries also mean greater risk. Statistically, people with six inquiries or more on their credit reports can be up to eight times more likely to declare bankruptcy than people with no inquiries on their reports. While inquiries often can play a part in assessing risk, they play a minor part. Much more important factors for your score are how timely you pay your bills and your overall debt burden as indicated on your credit report.

As for your other question, you may benefit from keeping unused cards open because it would help your credit utilization ratio, which factors into your credit score. It also affects your length of credit history calculation, so if it's only a year old as you say, it could have a slightly negative effect. Here is some more information on those points.
posted by roomwithaview at 6:21 PM on May 1, 2012

I got 6 credit cards last year (SIX) in a 4 month period.. Got rejected for one. I'm closing on my very first house in three days with the best possible credit rating and lowest possible interest rate.

(Do not do this at home).
posted by sandmanwv at 7:00 PM on May 1, 2012

(I think people will scare you, so I'm giving you a blog that I read every day for info)
posted by sandmanwv at 7:01 PM on May 1, 2012 [1 favorite]

If you're not planning on borrowing money or switching insurance any time soon, go wild. Even if you are, one credit card isn't going to make much of a difference. Your credit score is irrelevant if nobody's looking. One card wouldn't make an appreciable difference anyway, unless you were already debt laden.

What will help is the increased available credit, which gives you the flexibility to use some of your credit line for an emergency or whatever without having to worry one iota about your score.

You could take out 16 credit cards and it wouldn't matter past the next few months (many inquiries and all the new accounts bringing down your average age would bring down your score for a while).

Do not close your other cards, especially card A, unless they start charging you an annual fee and your credit file is still otherwise several years old. You want old trade lines. You want to use the card every once in a while to keep it active. You can buy a stick of gum and pay it off once every six months. (well, three sticks of gum, one for each card)

Feel free to use it, even pay a little interest if it's to your long term benefit. Paying interest is not necessary for a good score, but sometimes a little credit card interest is better than some other thing that might happen..or might not happen. But if the market is having a bad month and I need a grand, I'd much rather pay the $6/thousand/month for a couple of months than cash in some stock and potentially lose a lot more than $20.

That doesn't mean you should go out and buy frivolous things you don't need on credit that you can't pay off at the end of the month. It doesn't sound like that's a danger, so get on it, get your free trip. And the next one! And the one after that! And get another rewards card and use the crap out of it when you've hit the limit on the one you're getting. Make yourself some money at the banks' expense.

Keep your nose clean and soon you'll be able to buy a car with your credit card if you want. (great for rewards points, just be sure and pay it off by the end of your grace period!)
posted by wierdo at 7:26 PM on May 1, 2012

When I applied for a mortgage a couple years ago, the broker said I had excellent credit but the one negative was that I only had two credit cards - more would apparently have been better.
posted by songs about trains at 6:02 AM on May 2, 2012

As others have mentioned, the main long term negative you'll get from a new card is that it will drop your average credit line age calculation. Your average age is not that great already, so it most likely won't make much difference right now though. Also, as long as you keep all three accounts open, if you get a fourth card in 10 years, your average age will be better at that point than if you don't get one now and get a third card in 10 years. You'll also get a small drop in points from your application (a hard credit check), but that will only stay in your score calculation for a short time because inquiries get erased from your record more quickly than anything else on your report. And as others have mentioned, in terms of credit score, having a higher total credit limit will help you (for loans that don't use your straight credit score, it could possibly hurt you, such as by raising your credit limit to income ratio which your credit score cannot track). Overall it it won't have that much of an impact, continuing to keep your existing cards open and never missing a payment ever will do much more to keep your score high. If you want to simulate this situation or other scenarios, Credit Karma has some good free tools (although you have to give them access to your credit information).
posted by burnmp3s at 6:40 AM on May 2, 2012