I either read or heard somewhere that applying for too many credit cards can actually make your credit rating worse. I guess I can see the rationale behind this - either you’re always maxing out your cards and need new ones or you’re a fool who goes for every promotion there is.
OTOH, unless there are other symptoms of irresponsiblity (late payments, going over limit, etc.), I don’t see why just the act of applying for cards would be so bad. So, does anybody know what the straight dope is on this?
I’m not an expert, but applying for several credit cards in a short time frame can look bad for a while. It can also look bad to have too much available credit on credit cards- for example, if you’ve got 5 cards, each with a $15,000 credit limit, and no balances. A large amount of available credit makes other creditors nervous because you could suddenly max them out, greatly increasing your debt load.
I’d avoid opening a large credit line, or applying for several credit cards right before applying for a car loan, for example- you might end up slightly increasing your interest rate.
I think Arjuna34 is right that too much available credit can scare away potential lenders. What can also really hurt you is getting turned down by a bunch of credit cards. If a lender sees too many rejections, they are more likely to be wary of lending.
Many lenders use things called “FICO” scores in deciding whether to extend credit. They obtain these scores when they run a credit report on you. (Note that if you get your own credit report, you won’t be told your FICO scores - you have to finagle them. For example, my husband convinced a potential lender to reveal the scores.)
The formula for calculating FICO scores is a deep dark secret, but, it’s pretty well known that applications for credit will reduce your scores, if only by a little.
Why is this? Well, it was explained to us that running around applying for credit is a symptom of someone who might be in trouble.
Several recent inquires on a credit report decreases the likelihood of your credit being approved. There are several reasons and most have already been identified.
Another reason is that recent inquires are difficult to verify credit and balance. A lendor wants to be very confident about the debtor’s credit to income ratio. Seeing multiple recent inquires presents the problem of confirming whether or not the debts exist and what balance (obligation) the debtor has. Most lendors report to the credit bureau monthly or semi-monthly so the potential exists that the debts haven’t shown on the abstract yet which requires verbal confirmation. Too much trouble for the apparent risk.
Also if you do have many new accounts you haven’t had the opportunity to prove your ability to repay.
Actually Mouse (welcome to the boards, by the way :)), Equifax will give you a copy of your credit report that has your FICO score on it, along with a translation of sorts. I’ll probably order this in a few days for the heck of it. (I mean, I know my credit report is almost spotless, but you can’t be too sure…)
Actually, my wife had problems getting a store card simply because she’d never had any credit. No credit cards, storecards or loans. (She only wanted the storecard to get the introductory 10% off a large spend she was doing that day - paid the thing off immediately and cut it up).
A credit report does not show “rejections”. It really doesn’t show whether you applied for credit, only that an inquiry was made on your record, who made it, and the date. An inquiry is generally assumed to be a request for credit, though some companies (car dealers especially) are prone to inquire whther or not a credit app is ever completed. They like to pull your credit history in advance (like while your on the test drive) so they know what they’re dealing with - sleazy, but common.
One could, I suppose, infer credit rejections by subtracting open accounts from inquiries, but I don’t know any lender who does this. The real fear is that all those inquiries will turn into active accounts and increase your potential debt load.
In spite of having no particular knowledge about this, I’m going to disagree with everyone… Sort of.
I would expect that the reason credit agencies will ding you on your credit rating for having too much outstanding credit is that they have data showing that people with lots of credit are riskier than people with less credit. The “why” of it discussed here is probably correct, but I doubt that any of the explanations carry much weight compared with actual data.
As Xerxes mentioned, too little credit is also bad. I’d expect all the companies have there own (proprietary) formulas for how much credit you “should” have, as a function of your income, where you live, and whatever else correlates well with credit and credit risk.
When you apply for credit it lowers you Beacon score which can worsen your chances for getting credit.
The website explains it better, just click on the tab at the top that says “Understanding FICO Scores”
Here’s another little detail I got from Consumer Reports. If you’re car-shopping, some dealers will get your name upon introducing themselves. While you’re browsing, they’ll run a credit check on you without telling you. After a series of dealers does this in a few days, your credit rating starts to look shabby.
Yes, it’s true, and it happened to me, with simple a checking account.
I was at a small bank and decided to get two new accounts at Wells Fargo (since they had more ATMs) one DBA for my small business, and one personal with my wife as a joint applicant.
They reversed it, however and put the DBA as joint and my personal account as just me. Both WERE APPROVED, however.
To correct it, the teller closed both accounts and tried to give me new ones. But my credit was instantly “bad” because I had just opened two other accounts, and so the corrected ones WERE NOT APPROVED.
I asked her to fix it since she knew what had happened and she said it would require a manager. I pointed to her name tag that said Branch Manager, but she said that was sort of an honory title that 1/2 the tellers had. Her real manager said it was out of his hands to override a credit report denial.
So I left in disgust.
But - [note Irony with a capital I] two months later Wells Fargo took over my bank and transfered the accounts for free.
