Applying for credit cards can be tempting, especially when attractive rewards, introductory APRs, and signup bonuses dangle before you. However, before you start filling out application after application, take a moment to consider the potential pitfalls. Applying for multiple credit cards in a short period can significantly impact your credit score and overall financial well-being. This article will delve into why you should avoid applying for multiple cards and offer practical advice on how to navigate the credit card landscape strategically.
Why Applying for Multiple Credit Cards Hurts Your Credit Score
Hard Inquiries and Their Impact
Each time you apply for a credit card, the issuer makes a “hard inquiry” into your credit report. This inquiry stays on your report for about two years, although its impact diminishes over time. While a single hard inquiry generally has a minimal effect, multiple inquiries within a short period can significantly lower your credit score.
- Example: Applying for three or four credit cards within a month could drop your score by 5-15 points per inquiry, potentially hindering your ability to qualify for loans or other financial products in the future. The exact impact depends on the individual’s credit profile.
- Why it matters: Lenders perceive multiple applications as a sign of financial instability or desperation for credit. This is because it may suggest you’re relying too heavily on credit to manage your finances.
Decreased Average Age of Accounts
The age of your credit accounts is a crucial factor in determining your credit score. Opening multiple new credit cards at once drastically reduces the average age of your accounts, negatively impacting your credit score.
- Example: If you have a credit card that’s been open for ten years, and you suddenly open three new cards, the average age of your accounts will plummet. This decrease in age is especially harmful if you have limited credit history to begin with.
- Why it matters: A longer credit history signals responsible credit management to lenders. Younger credit accounts are seen as riskier.
Increased Credit Utilization
Credit utilization, which is the amount of credit you’re using compared to your total available credit, accounts for a significant portion of your credit score. While opening multiple cards increases your overall available credit, it also increases the temptation to spend more, potentially leading to higher credit utilization.
- Example: Let’s say you have a single credit card with a $5,000 limit and you consistently use $1,000 (20% utilization). If you open three new cards, each with a $5,000 limit, your total available credit becomes $20,000. However, if you now spend $4,000 across all cards, your utilization rises to 20% of the total limit. The problem here is if your spending on the new cards isn’t managed appropriately and increases total spending, your utilization might also increase even with the higher credit limits.
- Why it matters: High credit utilization (generally above 30%) signals financial stress and can negatively impact your credit score. It’s better to have a lower utilization rate across a smaller number of accounts than a high utilization rate even with a larger overall credit limit.
When Applying for Multiple Cards Might Be Acceptable (and How to Do It Right)
Spreading Out Applications
Instead of applying for several cards at once, space out your applications by at least 3-6 months. This gives your credit score time to recover from each hard inquiry.
- Example: Apply for one card now, wait six months, then consider applying for another.
- Why it matters: This approach minimizes the negative impact of multiple hard inquiries and allows you to build a more established credit history with each card.
Focusing on Specific Goals
Before applying for any credit card, identify your specific needs and goals. Are you looking to earn travel rewards, cash back, or a balance transfer option? Choose cards that align with your priorities.
- Example: If you travel frequently, focus on travel rewards cards with benefits like airline miles, hotel points, and travel insurance. If you’re carrying a balance on another card, prioritize a balance transfer card with a 0% introductory APR.
- Why it matters: This targeted approach prevents you from applying for cards impulsively and helps you maximize the value of each card you obtain.
Understanding Card Approval Odds
Before applying, research your chances of approval. Some credit card issuers offer pre-approval tools that provide an indication of your approval odds without impacting your credit score. Reviewing approval requirements can save you from unnecessary hard inquiries.
- Example: Many card issuers like American Express, Capital One, and Discover offer online pre-approval tools. Use these to gauge your chances before submitting a formal application.
- Why it matters: Understanding your approval odds allows you to target cards you’re likely to be approved for, minimizing the number of hard inquiries on your report.
Alternatives to Opening Multiple Credit Cards
Requesting a Credit Limit Increase
If your goal is to increase your available credit, consider requesting a credit limit increase on your existing cards. This avoids a hard inquiry and can improve your credit utilization ratio.
- Example: Call your credit card issuer and ask for a credit limit increase, citing responsible credit management as your reason.
- Why it matters: A credit limit increase provides access to more credit without the negative impact of multiple hard inquiries.
Using a Secured Credit Card
If you have a limited or damaged credit history, a secured credit card can be a good option for building or rebuilding credit. These cards require a security deposit, which serves as your credit limit.
- Example: Open a secured credit card with a $500 deposit. Use it responsibly, making on-time payments, and eventually, you may be able to transition to an unsecured card.
- Why it matters: Secured credit cards provide a safe and effective way to establish or improve your credit history without the risk of being denied for multiple unsecured cards.
Becoming an Authorized User
Consider becoming an authorized user on someone else’s credit card account, such as a parent or spouse. This can help you build credit without applying for your own card.
- Example: Your parent adds you as an authorized user to their credit card account. Their responsible credit management will be reflected on your credit report, helping to improve your credit score.
- Why it matters: This allows you to leverage someone else’s positive credit history without the need for a hard inquiry or the responsibility of managing your own account.
The Dangers of Churning Credit Cards
What is Credit Card Churning?
Credit card churning is the practice of repeatedly applying for credit cards to earn signup bonuses and then closing the accounts after receiving the bonus. While it might seem like a lucrative way to earn rewards, it can be risky and ultimately detrimental to your credit score.
- Example: You open a credit card, spend enough to earn a signup bonus, receive the bonus, and then close the account after a few months. You then repeat this process with other credit cards.
- Why it’s risky: Repeatedly opening and closing accounts can raise red flags with credit card issuers and negatively impact your credit score.
Issuer Restrictions and Blacklisting
Credit card issuers are aware of the practice of churning and have implemented measures to prevent it. Some issuers may restrict you from opening new accounts if you’ve recently closed accounts with them or opened multiple accounts in a short period.
- Example: American Express has a “once-per-lifetime” rule for signup bonuses on some of its cards. Chase has the “5/24 rule,” which means you won’t be approved for many Chase cards if you’ve opened five or more credit cards (from any bank) in the past 24 months.
- Why it matters: These restrictions can limit your ability to earn signup bonuses and potentially damage your relationship with credit card issuers.
Long-Term Financial Impact
While churning may provide short-term rewards, it can have long-term consequences. The constant opening and closing of accounts can negatively impact your credit score and make it more difficult to qualify for loans or other financial products in the future.
- Example: Your credit score drops due to excessive hard inquiries and a shorter average age of accounts, making it harder to get approved for a mortgage or auto loan at favorable rates.
- Why it matters: A healthy credit score is essential for accessing affordable credit and achieving your long-term financial goals.
Conclusion
Applying for multiple credit cards in a short timeframe can have significant negative consequences for your credit score. Hard inquiries, decreased average account age, and the potential for increased credit utilization can all contribute to a lower credit rating. Instead of applying for numerous cards at once, focus on strategically selecting cards that align with your financial goals and spacing out your applications. Alternatives like requesting a credit limit increase, using a secured credit card, or becoming an authorized user can help you build credit without the risks associated with multiple applications. Finally, avoid the practice of credit card churning, as it can lead to issuer restrictions and long-term damage to your credit score. By adopting a responsible and informed approach to credit card applications, you can maximize the benefits of credit while maintaining a healthy credit score and achieving your financial objectives.