Will a New Rewards Credit Card Harm My Credit Score?

Holly Johnson

December 31, 2018  •  4 Minute Read

Financial Tips

It’s easy to become entranced with the benefits of cash rewards and travel credit cards. After all, both options make it possible to earn gift cards, free merchandise, or free travel depending on the card you sign up for.

To get the most out of these cards, however, you must charge only what you can afford to repay and cover your bill in its entirety each month. If you can master that, you can truly get “something for nothing” — often to the tune of thousands of dollars in earnings per year.

Still, it’s smart to wonder how getting a new credit card will affect your credit score. After all, your credit score can impact the interest rate you’ll pay on credit cards and other loans, whether you can get approved in the first place, and even your auto insurance rates. It’s paramount to keep your credit score in tip top shape no matter what life throws your way.

How Will a New Card Impact Your Credit Score?

Before you can understand how a new rewards credit card might impact your credit score, it’s important to understand how your score is determined in the first place. For the purpose of this article, we’re going to talk about the most commonly used type of credit score — the FICO score.

There are five main factors that determine how your FICO score — which falls between 300 and 850 — shakes out. Those factors include:

• Payment history (35%)
• Amounts owed (30%)
• Length of credit history (15%)
• New credit (10%)
• Credit mix (10%)

As you can see, the two biggest factors that make up your FICO score are your payment history and how much money you owe in relation to your credit limits. Pay your bills on time and keep your debts low and your FICO score should be fine, right? Well, maybe.

The first part of that query is true. If you pay all your bills on time every month, you will help your credit score no matter how many credit cards or loans you have. The second part, however, can be tricky. Amounts owed can work for you or against you when you apply for a new credit card. Here’s how:

• If you apply for a new rewards credit card (and don’t close any old cards) and keep your balance low or pay it off each month, you’ll have more available credit than you did before you applied. This should impact your credit score in a positive way.
• If you apply for a new travel credit card and max it out right away, this will damage your credit score. Most experts suggest keeping your credit utilization at 30% or below for the best results.

The other factors that make up your FICO score may also work for you or against you if you get a new credit card. Here’s how:

• The average length of your credit history will be shortened when you add a new credit card to your portfolio. This is bad news for the length of your credit history, but then again, this factor only makes up 15% of your score.
• Your credit mix could be helped by adding a credit card to your portfolio if you have a combination of different types of loans, including installment loans.
• Getting a single new card shouldn’t hurt your score significantly —and definitely not long-term — in the “new credit” category, although getting several new cards at once could cause your score to drop.

Is a New Card Worth It? Here’s How to Decide

Before you decide whether a new credit card is worth the hassle, it might help to check your credit score to see where you stand. Fortunately, it’s possible to get a free estimate of your credit score at any time online.

Remember that, even though FICO scores run up to 850, scores in the 740+ range are considered “very good.” According to myFICO.com, this means that borrowers in this range “are at a great advantage in both the likelihood of getting credit approval and being offered lower interest rates.”

If your score is below that, you still may be in the clear. Scores in the 670 to 739 range are still considered “good,” which means borrowers in this range have a solid shot at getting approved for loans with the best rates and terms.

While it’s up to you to create a credit score goal to shoot for, remember that there are no trophies handed out for scores over 800. With that in mind, you may feel comfortable taking a small hit to your credit score to get a new rewards card. Also be reassured that a single new card make result in no impact to your score at all.

In addition to your credit score, another factor to consider before you get a new rewards card is whether you plan to pay it off each month. Remember that interest rates are typically higher on rewards credit cards, and that carrying a balance while pursuing rewards is never a good idea. Regardless of what anyone says, you should only sign up for a new rewards or travel credit card if you know you can pay your bill in full every month.

The Bottom Line

A new credit card is a big responsibility, but it’s one that can come with myriad valuable benefits. After all, the top rewards and travel credit cards let you earn points good for cash in your bank account, international flights around the world, and hotel stays at some of the planet’s most luxurious resorts.

If you’re worried about the impact a new card might make on your credit score, however, keep in mind that there are many factors that can lower or improve your score over time. As with most things in life, the credit game is all about responsibility and moderation. Like a cheeseburger or a slice of chocolate cake, a new credit card every once in a while won’t hurt you in the long run. Pay all your bills on time, keep your debts low, and treat your credit with care, and you’ll never have to worry.