So you’ve decided you need a new credit card, to replace the one whose introductory deals have all ended, and whose standard interest rate seems to have crept higher and higher. There are hundreds to choose from, and modern comparison sites make it easy to find the type you need – and to apply for potentially dozens at once.
However, making too great a use of these easy applications can be a big mistake, as it can inflict surprisingly serious harm on your credit rating. If you’re an A1 prime customer, you may not immediately see the effects, but if your rating is somewhere lower down the scale, then a sudden rush of credit applications can be enough to tip you over the edge into the dreaded bad credit territory. Why is this?
Credit File Inquiries
Every time you apply for a financial product, the provider will ask for a copy of your credit file. This action in itself will have an effect – every such credit inquiry will reduce your score by an average of five FICO points. There are protections in place if you’re shopping around for the best rate on, for example, an auto loan, where clear rate-comparison behavior is treated as a single inquiry for credit scoring purposes.
However, this doesn’t apply to revolving credit facilities such as credit cards, and every single application will reduce your score by a little. According to FICO, people with six or more credit inquiries on their file are eight times more likely to declare bankruptcy than those with zero inquiries, and so credit providers will clearly treat these applicants as a much less attractive customer.
Rejections and Approvals
Things can get worse. If your credit rating is poor, your applications will probably be rejected more often than not. As the number of inquiries builds up without a matching number of active accounts, it begins to form a clear picture that you’re desperate for new credit, and this will not fill future issuers with confidence in your financial stability.
Even if many of your applications are successful, you’ll potentially be left with a sudden, large line of credit. This increases the risk of you overextending yourself financially, and will have an impact on any future finance applications for important products such as a mortgage or auto loan.
How to Avoid This Danger
Luckily, it’s fairly easy to avoid this problem by being savvy about how you apply for new credit. Firstly, only apply for cards which you have a realistic chance of being accepted for. Check out the approval criteria first, and be honest with yourself about whether you meet them. Don’t be tempted to apply for the best-buy cards with all the greatest features if you know your credit history is patchy.
Secondly, limit your applications to one or two likely candidates at a time. This way, although it may take longer to obtain an approval, you can stop applying as soon as you’re successful instead of “overshooting” and applying for far more cards than you need to.
Lastly, the negative effects of applying for credit are more easily felt by those already having some difficulty. It’s a good idea to try and clear up your credit file first by checking it for errors, settling any small debts you’ve overlooked, and closing any old accounts which you’ve not used for a year or longer. All this will reduce the impact of the new inquiries on your record.
It’s very easy these days to apply for credit cards, but taking too much advantage of this simplicity can cause your credit rating real harm. Always keep in mind that filling out a finance application is a serious business, and approach it with a little caution if you want to protect your creditworthiness as much as possible.