You’ve probably heard that applying for credit will likely create an inquiry on your credit report (or reports) reviewed as part of the application process. You also probably know that inquiries can lower your credit scores. Fortunately, the impact to your credit scores from an inquiry or two will usually be small, and is fairly temporary since credit scoring models are usually most interested in inquiries within the past 12 months.
But what if you are approved for the credit you’re seeking? Does that change the impact on your credit? One reader asks:
Can you please clarify this for me? My current understanding is that if you apply but do get approved, that’s a good thing for your credit and it should go up instead of down. Is that right?
It must be a question on a number of people’s minds, as another reader recently asked:
If I apply for a credit card, I should have a hard inquiry on my credit report, and points should be taken off. I was wondering if there is a difference [between] getting approved and not getting approved from that hard inquiry? For example, if I apply for a card and don’t get approved, [will that] hurt my score? If I apply and do get approved for whatever type of loan I was applying for, will that also hurt my score?
The short answer is that you don’t get extra “credit” because a creditor approved your loan application. An inquiry on your credit report has the same impact whether you are approved or denied. In fact, your credit report doesn’t state the outcome of the application; only the fact that there was an inquiry is reported.
Now, what if you don’t use the card right away? Will that affect your scores? A reader who is just starting to build credit asks:
I have not activated my credit card yet only because I do not know that upon activation, if my credit score immediately becomes affected if no purchases are made during the activation month.
It’s true that a new account on your credit profile can actually lower your scores a bit, since a new account — especially one with a balance — is considered a risk factor. But any dip will be temporary, and over time things should even out. I wouldn’t suggest you avoid using the card altogether. Just make small purchases you would make anyway, and pay it off in full.
How New Credit Can Help Your Credit Scores
Over time, this new account may help your credit scores in several ways. It may:
1. Improve your credit mix. If you have just one or two accounts open and active, then you may not score well for the factor “credit mix” or “types of credit.” That factor looks at the mix of different accounts you have, such as revolving and installment loans. If you have just one credit card, for example, adding a personal loan, mortgage, or student or auto loan to your credit history may help this factor over time.
2. Give you more breathing room on your utilization. One of the important factors in your credit score is the debt you carry. And within that factor, one thing a credit score looks at is how close you are to your credit limits on each of your revolving accounts (typically those are credit cards.) The closer your balances creep up toward your limits, the more that factor can hurt your credit scores. With a new card, you increase your overall credit limit, which can help when this figure is calculated in the aggregate. But it doesn’t change the utilization ratios on your individual accounts unless you transfer a balance from a highly leveraged card to the new one — provided you don’t then use a significant portion of the new card’s credit line.
3. Add a positive account to your credit reports. If you have had credit problems in the past, then adding an account that is always paid on time can help you build a stronger credit history over time. It’s especially helpful for those who may have been through bankruptcy or other serious problems and have few or no open, active accounts. Those negative items drop off your credit reports eventually, which can leave you with no credit history to be scored. No credit history can be as difficult to overcome as a bad credit history. Having a well-established account with an on-time payment history may help prevent your credit score from dropping when the bad stuff is no longer on your credit reports.
To find out what factors are affecting your credit scores, get your free Credit Report Card from Credit.com. Along with your free credit score, you’ll get a breakdown of the major factors that impact your score along with suggestions for building or maintaining strong credit.
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