Will a New Credit Card or Loan Account Hurt Your Credit Score? Here's What You Need to Know

1. Credit Score: Why It Matters
Your credit score, usually ranging from 300 to 900, is a critical indicator of your creditworthiness. A higher score means better chances of approval for credit cards or loans and often leads to better interest rates. Keeping an eye on your score is essential for maintaining a healthy financial profile.

2. How New Credit Card Applications Impact Your Score

  • Hard Inquiry Impact
    When you apply for a new credit card, lenders perform a hard inquiry, which temporarily reduces your credit score. Although a single inquiry has a minor effect, multiple hard pulls in a short time can indicate financial distress.
  • Credit Utilisation Ratio
    Once your new card is approved, it increases your overall credit limit, which can lower your credit utilisation ratio – a good thing! Keeping this ratio low is crucial for maintaining a healthy score.
  • Average Age of Accounts
    A new credit card will decrease the average age of your credit accounts. A longer credit history is beneficial, so be mindful of this when opening new accounts.

3. The Impact of a New Loan Account

  • Hard Inquiry for Loans
    Just like with credit cards, a hard inquiry occurs when you apply for a loan, causing a slight dip in your score. However, this effect is typically short-lived if you maintain a good credit profile.
  • Debt-to-Income Ratio
    A new loan increases your debt and affects your debt-to-income ratio. Lenders use this ratio to assess whether you can handle additional debt.
  • Credit Mix
    A diverse credit mix (credit cards, personal loans, etc.) positively impacts your score. Adding a new loan can improve this mix and help boost your score over time.
  • Payment History
    One of the most crucial factors for your score is payment history. Timely payments on loans and credit cards will help maintain or even raise your credit score, while late payments can hurt it significantly.

4. How to Manage New Credit Accounts

  • Minimise Hard Inquiries
    Avoid applying for multiple credit cards or loans in a short time. Multiple hard inquiries can signal financial instability.
  • Keep Balances Low
    If you open a new credit card, use it wisely! Keep your balances low and always pay them off promptly.
  • Pay on Time
    Whether it’s your credit card bill or a loan EMI, making on-time payments is crucial to maintaining a strong credit profile.
  • Monitor Your Credit Score
    Regularly track your score and report any errors to authorities. Keeping tabs on your credit health helps avoid surprises and ensures accuracy.