I've opened more than a dozen credit cards and figured out exactly how opening a card for the bonus affects my credit
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- New credit cards temporarily lower your credit score, but using them responsibly can raise your credit score in the long run.
- Sign-up and welcome bonuses can be a good incentive to open a card, but otherwise a card you open for a points or miles bonus behaves the same as any other card.
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Reading Chris Guillebeau's popular blog, The Art of Non-Conformity, I found that signing up for credit cards and earning bonuses is a quick path to free and discounted travel.
But as a former bank manager, I knew there would be costs on my credit report if I went on a card-opening spree.
I got my first card specifically for rewards. It was a British Airways Visa Signature Card, and I took home a huge bonus (no longer offered) worth enough for a trip to London, Paris, and Amsterdam. In the years since, I've opened more than a dozen credit cards and added quite a few lines to my credit report.
Over time, I've found opening cards for the welcome bonuses helps - not hurts - my credit. But that's because I've kept my balances low, made my payments on time, and avoided borrowing more money than I can repay.
The welcome bonus can be a good reason to choose a card in the first place, but ultimately any card you open should be used responsibly.
What happens to your credit when you apply for a new credit card
When you apply for any new credit account, the lender will want to know your credit score and credit history. In most cases, that involves a "hard pull" on your credit.
A hard credit inquiry shows up on your credit report for two years. It is visible to other lenders when applying for new credit during that two-year period and slightly lowers your credit score until it drops off. In my experience, a typical credit inquiry costs me around three to six points from my credit score. (Remember, the best possible credit score is 850.)
Free credit score website Credit Karma offers a cool credit-score simulator that can help you estimate what an inquiry and new card would do to your own credit.
If you apply for a bunch of credit cards in a row, the impact to your score will add up. Lenders will also see this trend as a risk and are more likely to turn you down for new credit. But if you space things out enough, the effect of an inquiry on your credit score isn't a very big deal as long as you have good or better credit.
If you have a negative credit history, you are unlikely to qualify for credit cards with the biggest bonuses, but you can work to improve your score over time to save yourself money and increase your approval odds with all future credit.
What happens to your credit when you open a new credit card
If approved, your new account will show up on your credit report in the next month or so. A new credit card temporarily lowers your credit score, but the long-run impact is actually a positive in most cases. As long as you keep your balances low and pay off your cards in full every month, they generally help your credit score over time.
A new card lowers your average age of credit accounts, a metric in your credit score. If you can keep a high overall average age, it will help your score. Each new account hurts your average a bit, but old accounts help negate the new ones. This is why you should never rush to close an old credit card with no annual fee.
Read More: Here's how to collect valuable credit card sign-up bonuses while helping your credit score
If you plan to apply for a new car or home loan in the next six months to one year, you may be best off skipping new credit cards. Otherwise, fear of damage to your credit shouldn't scare you off from a new credit card every once in a while.
New cards help your credit in the long-term, as long as you use then responsibly
New credit card accounts help your credit score over time in several ways. If you maintain a perfect on-time payment history, each payment acts as evidence to future lenders that you are a responsible borrower.
Credit scoring models from FICO and VantageScore both favor credit profiles with a diverse range of accounts that are all well managed. Once you overcome the temporary negative impact of a credit inquiry and new account, your score should slowly begin to climb.
Read More: The best way to build your credit is the same strategy people use to build wealth
In the time since that first card, my credit score has climbed from around 700 to around 820. I've also had some mortgages and paid off my student loans along the way, but my credit score has held a steady upward trend despite adding dozens of cards to my credit report.
The key to success with credit is keeping balances low, paying on-time, and avoiding borrowing more than you can afford to pay back. With credit cards, the temptation to overspend can be difficult for some. But if you can avoid the trip to the mall or favorite online store, there is little risk from opening new credit cards.