Applying for credit cards isn’t something you should take lightly because it absolutely can hurt your credit score. One credit card application can ding your score by just a few points, but multiple applications could raise red flags for lenders and drag down your credit score accordingly.
Still, while applying for a credit card can hurt your credit, there are a number of potential pluses to credit cards,
from allowing you to build your credit history to earning rewards. Here’s how to navigate the effects of applying for credit on your credit score.
Related: What Is a credit spread? Explained and defined
How Applying for Credit Cards Can Hurt Your Score
While you won’t take a big hit when you apply for a credit card, you will get dinged. Why? When you apply for a credit
card, the card issuer will pull your credit in what’s called a hard inquiry because they are seeking
information in order to determine whether you are a good candidate to lend money to.
Hard pulls stay on your credit report for two years, though their impact on your credit scores typically vanishes
after a year. In contrast, soft inquiries don’t affect your credit score no matter how often they occur because they aren’t requests for new credit, just information. A soft credit inquiry may happen when you check your credit
report, for example.
The reason that hard inquiries can lower your credit score is because a new application can represent more risk for the
card issuer. The uncertainty that applying for new credit adds can be compounded if you have just a few accounts or not much in the way of credit history.
That being said, new credit is among the factors that impact your FICO score, so the drop isn’t necessarily a reason to
forgo credit applications entirely. Just make sure to proceed thoughtfully when weighing the decision of whether to apply for a credit card.
Should You Apply for Multiple Credit Cards at Once?
Simply put, no. This is a bad idea. It might make sense to apply for more than one job at a time, but that’s not the
way to go with credit cards. You should pursue credit cards strategically.
By applying for several cards over a short period, you might send the signal that you’re desperately seeking funds
and headed for — or already in — trouble. You’ll appear risky to lenders and that will likely be reflected by a dip in your credit score.
Of course, this doesn’t mean you can’t have more than one credit card. You’ll just want to take your time and space
out your acquisitions. If you get rejected for a card, pause to figure out why and then take steps to address the suspected weak spots. Once you’ve had time to improve your credit, consider trying again.
Can Applying for Credit Cards Help Your Score?
There are two sides to a coin and so it goes with applying for credit cards — there is some upside.
If you open a new account, this could lower your credit utilization ratio, which is your outstanding balances compared to your overall credit limit. This accounts for 30% of your score and is second in importance only to your payment history.
Another potential plus is that if you make payments on your new credit card on time, your positive payment history can improve your score over time. However, if you’re a credit card newbie, you may not see the uptick in your score as quickly. This is because FICO requires you to have at least one account that’s been open for six months and one account that’s been reported to the credit bureau within the last six months to qualify for a credit score.
If you don’t already have a handful of credit card accounts, a new card also can boost your score because it’s adding another revolving account. While it only accounts for 10% of your credit score, credit scoring models do look at your mix of account types.
Things to Consider Before Applying
Before you rush to apply for credit, make sure you’re ready. Here’s what to consider doing prior to applying.
Check your credit report: The first step is to get a copy of your credit report. Until April 20, 2022, you can get free weekly credit reports from the three national credit reporting agencies, Equifax, Experian and TransUnion. To get your free reports, go to AnnualCreditReport.com. As you review your credit report, check for any errors in your report. If there are any, take steps to fix them before you approach a credit card issuer. Also check to see if you’ve had any other recent hard inquiries.
Consider any other upcoming credit applications: Be mindful about what’s on your horizon before you move forward with applying for a new credit card. For example, if you think that you will be applying for a mortgage or car loan soon, you may not want to apply for a card and rack up multiple inquiries at once. It may make sense to get your mortgage or car loan first and wait for a little while to go after the credit card.
Don’t plan to ditch your old cards: Just because you hope to get a new card, don’t start canceling the other cards in
your wallet. Remember, length of credit history makes up 15% of your credit score. You’ll also reduce your total available credit by canceling a card, which could drive up your credit utilization ratio if you have hefty balances on other cards.
Think about why you want to apply for a credit card: Lastly, have a little talk with yourself. A credit
card rule of thumb is just because you can get a credit card doesn’t mean you need one. If you already have a credit card, what’s driving you to apply? How are you managing your existing credit card? If you’re not 100% sure you’ll be able to pay off the balance in full each month, think twice about getting it. When balances linger from month to month, it becomes costly
due to interest racking up.
The Takeaway
Applying for a credit card may be a simple process in terms of filling out the forms, but that doesn’t mean it’s
something to take lightly. It can have very real effects on your credit score, and thus is always something to be considered carefully and done responsibly.
Learn more:
- Should you take out a personal loan to pay off credit cards?
- How to choose the best rewards credit cards
This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.Third Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third party trademarks referenced herein are property of their respective owners.Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.SoFi’s Relay tool offers users the ability to connect both in-house accounts and external accounts using Plaid, Inc’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score provided to you is a Vantage Score based on TransUnion™ (the “Processing Agent”) data.
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Can medical bills affect your credit report?
Medical costs can sneak up on you. They’re often confusing and even frustrating.
Billing statements may be hard to read. So can an insurer’s explanation of benefits (EOB). Sometimes there’s a coding error or the charges are mistakenly denied. Or maybe there just isn’t enough money in the bank to pay the bill all at once.
Meanwhile, time may pass while you’re making phone calls, asking questions and waiting on some kind of resolution — and the bill might go unpaid during that time. Maybe forgotten. Maybe ignored. Maybe impact your credit.
Most doctors and hospitals don’t report unpaid bills directly to the agencies that determine a person’s credit status. But if a bill becomes delinquent while you dispute an insurance claim or try to negotiate a payment, it eventually could land in the hands of a debt collection agency.
And if that bill collector reports it to one or more of the major credit bureaus, it might result in a ding to your credit standing and/or a decrease in your credit score.
Before we get started, a brief note: As with any credit-related tips in articles like this one, your mileage may vary.
The views in this article are very general in nature and based on assumptions, and it’s likely your situation will differ and have all sorts of variables we can’t account for. Never rely on a blog post like this one for financial, legal, or tax decisions.
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Nearly three in 10 insured Americans have had an unpaid medical debt sent to a collection agency, according to a 2019 Consumer Reports survey.
Of the 1,000 adults surveyed, 24% said they didn’t realize the bill was owed, and 13% said they never received the bill. Another 10% said the bill was sent to collections mistakenly, even though they had already paid.
What constitutes a delinquent account may vary between medical and medical insurance providers.
Also, according to the same Consumer Reports survey, nearly one-fifth of Americans say their credit scores have been negatively affected by unpaid health care bills.
A low credit score may make it more expensive to borrow money (at a higher interest rate) or more likely that a loan application could be denied.
Determining how an unpaid medical bill will affect your credit standing could get complicated. The credit models lenders use to gauge their amount of risk in working with borrowers typically include things like payment history, amounts owed, length of credit history, credit mix and new credit.
But the current models may give different weights to various categories when making their assessments. It’s also good to note that different lenders may employ varied credit scoring models.
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There’s good news for those struggling with medical debt, however. With FICO Score 9, the newest version of FICO credit scores, as well as VantageScore 3.0 and 4.0, medical debt now has less impact on a person’s score because it carries less weight in the calculation.
Another recent change is that the three credit reporting agencies now have to wait 180 days before including an unpaid medical bill on a credit report.
That grace period is meant to give consumers, health-care providers and insurance companies an opportunity to sort out their differences before the bill damages a person’s credit.
Once that six-month period is over, however, if the bill is over $100, it can go on a person’s credit report. That said, the credit agencies remove medical debt from a person’s credit history once it’s fully paid off.
DepositPhotos.com
Even with these new changes, it’s still important to take an active role in making sure medical bills don’t crush your credit. It may be worth considering these steps:
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Just because you left a doctor’s office without forking over more than a copay, doesn’t mean you’re done. The bill’s submission to your insurance company doesn’t automatically mean it will be accurate or even paid.
Reading the bill and the insurance company’s explanation of benefits to be sure there aren’t any errors — and to see if you’re still responsible for paying some part of the remaining balance — could prove helpful. Following up with monthly or even weekly calls to make sure the bill is paid may also be key.
If the time has passed without resolution and your health-care provider is threatening to turn the bill over to a collection agency, one general recommendation is seeing if you can negotiate a payment schedule instead — while continuing to pursue reimbursement from your insurance company if you feel you should be covered.
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If you know ahead of time that you won’t be able to pay the entire amount owed, it’s recommended to contact the healthcare provider’s billing office or financial department and try to negotiate a lower amount or a payment plan. If you can come to an agreement, it’s a good idea to get it in writing.
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If a collection agency employee contacts you about a bill you think has been paid or should have been paid by insurance, stay calm and ask if you can call back with information that shows there’s no open balance.
If you do, in fact, owe some money, one option is to ask if you can send the money right away to avoid any damage to your credit. Again, it’s recommended that you get everything in writing.
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If your bill went to collections by mistake, you can take steps to have it removed. Collect as much evidence as you can to prove your case: Dig up copies of old credit card or checking statements or ask for payment records from your medical provider’s billing office.
If your insurance company shows you as already having paid the bill, provide whatever paperwork you have. Another common step is to file a dispute with the credit bureau that’s reporting the error.
The credit bureau will need to investigate and respond to you within a prescribed period of time — 30 days. You may also receive email updates from the credit bureau regarding the status of your dispute.
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If the balance on your medical bill is yours to pay, you can look for ways to make that process manageable. If there’s room in your budget to pay it off immediately without borrowing money — even if you have to make some adjustments — then that may be your best bet. Or maybe you can take on a temporary side hustle to cover the cost.
If that’s not possible, you may wish to explore other avenues, such as a zero-interest or low-interest credit card, as long as you can be disciplined about making on-time payments and are able to pay off the balance before the introductory rate goes up.
Or you may consider an installment loan such as an unsecured personal loan to pay off the balance of your medical bill before it goes to collections. A personal loan might have a lower interest rate than your credit cards (depending on your credit record and other factors) and may offer additional options for repayment.
A personal loan may be beneficial when negotiating with your medical provider, who may prefer to be paid in a lump sum rather than over months or years.
Key to maintaining a solid credit record is to pay bills on time — long before they reach collections. Staying on top of medical bills can mean extra vigilance — but the effort has the potential to make a real difference to your financial future.
Learn more:
This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s
website.
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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