Think Twice About Applying for Credit

Americans paid down billions in credit card debt during the pandemic, with balances declining 17% in the first quarter of 2021 compared with a year earlier, according to the Federal Reserve Bank of New York.

But now that the economy is recovering, credit card issuers are eager to entice new applicants with flashy deals and sign-up bonuses. For example, the Chase Sapphire Preferred Visa and the American Express Platinum card are offering up to 100,000 bonus points for new cardholders.

While you might be inclined to take advantage of these deals, some short-term credit decisions could lead to long-term damage to your credit score. Whether you’re applying for credit for the first time or have an established credit history, it’s important to consider how new lines of credit could affect your ability to obtain credit down the road.

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Existing credit history. If you already have a credit history and are looking to apply for new credit, your biggest consideration is timing. Applying for a credit card will trigger a “hard inquiry” into your credit report, and each inquiry can lead to a two- to five-point deduction in your credit score.

For that reason, if you’re looking to apply for an auto loan or mortgage, hold off on credit card applications so you can secure the lowest interest rates possible. Experts recommend avoiding new applications for at least six months before applying for a mortgage; credit expert John Ulzheimer, author of The Smart Consumer’s Guide to Good Credit, goes so far as to suggest a year of “credit downtime.”

Even if you’re not taking out a significant loan soon, there are other timing considerations that come into play. Credit expert Gerri Detweiler, author of The Ultimate Credit Handbook, explains that although multiple mortgage and auto loan inquiries in the same time period (about 14 to 45 days) are often grouped together in your credit report and won’t hurt your score, that’s not the case for credit cards. Because each individual hard inquiry will impact your credit score, Beverly Harzog, author of The Debt Escape Plan, suggests waiting four to six months between new applications.

In addition, applying for multiple credit cards to reap the benefits of rewards or sign-up bonuses—a practice known as credit card stacking—could backfire. Credit card companies are aware of this practice and may deny your application if they think you’re trying to stockpile rewards.

No credit history, no deal. If you don’t have a credit history—you’re a college student, for example, or a recent graduate—you’re unlikely to be approved for most of these credit card offers. Instead, work on developing a good credit history so you’ll qualify for low rates and generous incentives in the future. Many major credit card issuers offer student credit cards, which have lower credit limits and student-friendly rewards to help new users develop a responsible credit history. Another alternative is a secured credit card. With this option, you put down an initial deposit (usually $300 to $500) that serves as your credit limit. As you build credit, you can switch to a traditional un­secured credit card with a higher limit.

Whichever option you choose, paying off your balance every month will ensure you remain creditworthy and prevent you from accumulating debt you can’t repay.