Let’s find out.
Having a credit card is one of the smarter ways to manage your financial situation. You can use it as emergency fund, or get discounts, cashback and rewards on special occasions. But did you know? All the spending you do with a credit card is recorded in the banking system, and each one of us has this record called credit score.
Credit score analyses the credit history of a person, showing whether or not a person is likely to pay the credit back. It helps banks and other lenders determine how high is the risk of lending you any credit. The higher your credit score, the more chance you have in getting your credit accepted. Your credit score affects your chances of getting loans, mortgage, car leasing, property rents, and many more.
There are five major points that affect your credit score:
Payment history affects 35% of your credit score. The more disciplined you are in paying the full bill on time, the higher score you will likely get.
Credit utilization is the ratio of your outstanding credit balance to your credit limit. In other words, credit utilization shows how much amount you owe compared to the limit you have. It affects 30% of your credit score. The lower the ratio, the higher is your credit score. For the best score, never use more than 30% of your credit limit.
Age of credit
The longer your credit has been open or active, the better your credit score is. The age of credit influences 15% of your credit score.
Mix of credit
Mix of credit only applies to those who have different types of credit, such as credit cards, mortgage, property rent, or others. It affects 10% of your credit score.
New credit inquiry
New credit inquiry only affects 10% of your credit card, but mind you, it can be tricky. New credit inquiry can either help or hurt your credit score. Let’s elaborate a little on this point.
New credit inquiry may help on your mix of credit point. It shows that you are capable of managing more than one type of credit. Let’s say you can successfully manage both a credit card and car finance, you will gain higher mix of credit points. New credit inquiry also makes more room for credit utilization. If you have higher credit limit, while your outstanding balance remains the same, your credit utilization ratio will be lower. Hence, higher credit score.
On the other hand, new credit inquiry may hurt your credit point since it lowers your age of credit. Also, your credit report automatically records your inquiry, even if it later gets rejected or you decide not to take the credit.
To wrap things up, we can say that applying for a new credit card, or other types of credit, can either help or hurt your current credit score. Make sure you only apply for a new credit inquiry when your financial situation really calls for it. Otherwise, you might only be in for unnecessary debts, high interest rates, and low credit score.