When you think of getting a new credit card several questions will pop into your mindthat could occasionally influence your choice. Prior to making a decision to apply for a credit card, the most common question is “Can applying for a credit line affect my credit score?” If so, will it have negative or positive effects? This can be determined by opening a new credit card. It could result in a positive or negative impact on your credit score. On one hand, it lowers the ratio of your credit utilization, which can improve your credit score. But on the other hand it decreases the average age of your credit accounts, which could be the cause for your credit score getting lower. This article will help you comprehend all the advantages and disadvantages of opening a brand new credit card account so that you can make your choice carefully. Keep reading to know more about:
Benefits of Opening an Account with a New Credit Card
Low Credit Utilization Ratio
When your total credit limit increases, opening a new credit account can reduce your credit utilization ratio. If the limit of your credit card is Rs. If the limit of your credit is Rs.50,000 and you pay Rs. You are using 60% of your credit limit every month. This could negatively affect your credit score. To keep a high credit score, try to spend only 30% or less than your credit limit. If you have the credit limit of Rs. 1 lakh, your credit card will be closed. The total limit is Rs. 1 lakh if you open a new credit card with the credit limit of 1.5 lakhs. 1.5 lakhs. If you spend 30,000 in a month, 20 percent of your credit line is used. This is very beneficial for your credit score. This is why opening a credit card could help decrease the amount of credit you use and increase your credit score.
Credit Mix
It is better to have several credit accounts instead of just one to ensure you get good credit scores. The credit mix you have is 10 percent of your credit score, therefore it is crucial to have multiple credit accounts. Opening a new credit account will help you improve your credit score because you will have more than one credit card. You may also start a new account to boost your credit score.
There are a few disadvantages to opening a new credit card.
Hard Inquiries
The credit report and your credit score is inspected by the card issuer when you apply for credit cards. This is done to assess your creditworthiness and your financial history. This is referred to as a hard query on the credit card you have. In the beginning you may see a slight reduction in your credit score following applying for credit cards but it’s always good for the long run.
Average Age of Credit Accounts
The age average of your credit accounts also is a factor in your credit score. Your credit score will improve in the event that your account is of a longer time. If you decide to open a brand new credit card then the average age of your credit accounts will be decreased and your credit score may go a bit down. If, for instance, you have 1 credit card account in the past 7 years, the average age of your credit account is 7 (7/1) however, when you open a new credit card, the typical age of your credit cards is 3.5 ((7+0)/2). However, it will affect the credit score of your in a more immediate manner and you can work to improve it.
Bottom line
The process of opening a new credit card account can offer both advantages and disadvantages that we’ve already talked about. It is evident that having a new card can only affect your credit score on a temporary basis and will benefit you in the long term. It is essential to be aware that opening a brand new account could reduce your credit utilization. This can greatly assist in improving your credit score. The credit utilization ratio represents 30 percent of your credit score. You should not overspend on a higher credit limit when you open an account. Therefore, getting a new credit card could be a good decision, as long as you are able to utilize it prudently.