In a book on “frugal wedding ideas,” my fiancee read the suggestion of getting a credit card that earns airline miles. (The idea being you can charge wedding expenses to it, and build up towards getting a free ticket for the honeymoon.)
But we’re also thinking about buying a house sometime in the next year or two, and I’ve heard that applying for new lines of credit can mar one’s credit rating. So, my questions for the millions are:
- Is that true?
- If it is, how severe is the credit hit?
- Also if true, for how long is one’s credit affected? If it matters, we don’t intend to carry a balance. We’d pay it off in full every month.
Thanks in advance for any wisdom on this topic!
-P
That depends on how much credit you already have. A young couple with no credit will benefit enormously from getting their first credit card, as long as they pay promptly and do not carry a balance. A second and third card may also improve the credit rating, as long as the total credit line does not exceed the couple’s means.
However, if the total credit line gets too large, lenders get nervous; they see that the young couple could sign the loan papers and then turn around and borrow huge amounts of money, rendering themselves unable to pay the loan. In this situation, every additional card reduces your credit score.
You might be able to reduce this impact by getting a rewards card with a small line of credit. Tell the credit card issuer that that’s what you want – they’re often quite eager to please.
It does little or no good to close out credit cards, however, as closed lines of credit are also counted against you. Maintaining a zero credit balance will help, but it won’t completely counter the effect of the extra credit. Nobody but Fair, Isaac Co. knows exactly what the hit will be, but in my experience as a borrower, it’s not that big.
Just last week I applied for the AA-Citi card. Seeing as we live off a credit card every month and I owe the wife a trip home a few times per year, $1/mile seems pretty good and I feel stupid for not having done it before.
Sooo… looking at my credit history on 07-March via Equifax, assuming my new card is approved for $5,000 (probably be lower), the “FICO Score Simulator” told me this: My current score, x, would be (after being issued the new card as stated) in the range of x-10 to x+10. The worst case x-10 still has me in the range of, uh, not having to worry about my credit.
However, I have a huge quantity of unused credit, and I wanted to unload some of it when I got this new card, i.e., close some revolving accounts. Unfortunately the score simulator won’t let me simulate that. So Nametag, I wouldn’t care that closing these accounts helps me or not, but would it really, really hurt? I realize it would make my “available credit” drop, and then my credit usage would increase, but maybe it’d be good to know a threshhold that’s good for percentage of available credit used. I could then decide to close a $16,600 credit line (yeah, that’s a revolving, unsecured account but at 18.9% I won’t use it) versus a bunch of Sears, Hudsons, and a couple of other substantially smaller accounts.
If you’re the one that closed the account, then why should it be counted against you? I once closed a credit card because of problems with the credit company’s service. Seems to me that the closure ought to reflect badly on them, not me.
If the account reads “Closed at Grantee’s Request,” it doesn’t count against you. Only “Closed at Grantor’s Request” raises the question of “Why?”
Remember, every time you apply for credit, the creditor runs your report and if it credit is not granted, the request for a report shows up as an “inquiry.” A lot of inquiries with no credit granted makes you look very bad. Why are you trying to get so much credit, and why aren’t you getting it?
“closed by credit grantor” no longer affects most popular scoring models.
Having a credit card is better than having no credit card, especially if you can carry modest balances and pay them off within a few months.
Actually paying off small balances every month on revolving cards (visa/mc) is less beneficial to your credit than carrying modest balances and taking some time to pay them without ever being late. Got that?
You want to avoid multiple credit cards ( 1= best), and you want to avoid having no credit cards.
None of this is speculation.
~Resident Credit Guru