Does Applying for Credit Hurt Credit Scores?
Money Girl answers reader questions to clear up common misunderstandings about applying for credit and changing your credit limits.
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For instance, having good credit means you’ll pay less for insurance on your car and home (except in California, Massachusetts, and Hawaii, where it can’t be a factor in setting rates). If you don’t own a home, your credit typically is a factor in getting approved to rent an apartment or home.
Credit also plays a big role in utilities, such as water, power, gas, cable, and wireless service. Applying for these services is applying for credit—so having poor credit makes it difficult to get them. You might have to pay a hefty security deposit, get someone with good credit to co-sign your application, or get a letter of guarantee from someone that says they’ll pay your utility bill if you don’t.
And if I haven’t already made my point that having good credit can save you money, did you know that it can also help you earn more? Many employers check prospective employees’ credit reports before making hiring decisions. You could get turned down for your dream job if you have a credit report that makes you appear irresponsible with money.
What Happens to Credit Scores When You Apply for Credit
I received this email from Alex:
“I’m 23 years old and only have one credit card. I recently went shopping for engagement rings and the salesperson offered to check into how much I could finance. Yesterday, to my surprise, a store credit card with my name showed up in the mail. I don’t want the card. Is there a way to reverse the application as if it never happened, so it won’t hurt my credit?”
This is a really common predicament. Many consumers get talked into applying for credit cards that they don’t want—or think that they’re just signing up for a store promotion. Never give any personal information to a store clerk unless you intend to apply for a new credit account.
Did you know that having good credit can also help you earn more?
Unfortunately, there’s no way to reverse a credit application. Even if you cancel a new credit card quickly, it still shows up as an inquiry and credit account on your credit history. But the good news is that inquiries have a minimal impact on credit scores and the negative effect decreases quickly over time.
What Happens to Credit Scores When You Change Credit Limits
Here’s another question that I received from listener Michelle:
“I recently requested a credit limit increase on one of my credit cards. I always pay them off in full each month and have excellent credit. But now I’m worried that my request will end up hurting my credit score.”
You might be surprised to know that increasing credit limits can only increase your credit scores. That’s because your balance-to-limit ratio, known as your utilization ratio, is an important factor in how most credit scores are calculated. It’s simply a comparison of your total balances on credit cards and lines of credit to your total credit limits.
Lowering credit limits or closing a credit account causes your utilization ratio to increase, which typically hurts your credit. However, if you’re like Alex and want to close a new account quickly, the net effect of opening it and closing it should be a wash on your utilization ratio.
To maintain excellent credit for life, focus on what you can control by following these Quick and Dirty Tips:
· Pay all of your credit accounts and bills on time
· Maintain a utilization ratio that never exceeds 20%
· Use credit accounts, but never take on more debt than you can afford
· Have one or two credit cards that you use on a regular basis and pay off in full each month
· Check your credit report for errors that may be dragging down your scores
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