Does Applying For a New Credit Card Affect Your Credit Score?

Applying for a new credit card may result in a brief dip in your credit score, but it can also offer benefits in the long run, like improving your credit utilisation rate. This article covers what you should know before getting a new credit card.

Can applying for a credit card impact your credit score?

The credit score is used to measure your financial reliability, influencing your ability to secure loans and credit cards. Financial institutions in Singapore assess your credit score to evaluate your creditworthiness, determining the terms and limits of credit they may offer you. 

When you apply for a new credit card, the bank performs a hard inquiry into your credit report, which can cause a slight decrease in your credit score. However, responsibly managing the new credit card, such as making payments on time and maintaining low balances, can enhance your credit score over time. To check your credit score, you can generate a credit report from the Credit Bureau Singapore (CBS).

Why does applying for a new credit card affect your credit score?

Applying for a credit card in Singapore can affect your credit score negatively because of hard inquiries conducted by financial institutions during the application process. 

These inquiries are recorded in your credit report and may signal to lenders that you're facing financial difficulties, especially if multiple applications are made within a short period.

How does getting a new credit card affect your credit score?

Obtaining a new credit card in Singapore can influence your credit profile in multiple ways. Here is how getting a new credit card can affect your credit score:

Higher balances

A higher credit limit, often associated with a new credit card, may encourage overspending. While the additional credit may provide flexibility, it can also lead to increased debt accumulation if not managed properly. This is particularly true if you make large purchases or carry balances from month to month. If your balances grow too high relative to your credit limit, this will increase the credit utilisation ratio.

Credit utilisation, which is the percentage of the available credit you are using, is a key factor used in calculating your credit score in Singapore. Generally, keeping your credit utilisation below 30% is recommended for maintaining a healthy score. Financial institutions assess this ratio when evaluating your creditworthiness for loans or new credit facilities. 

Thus, while a new credit card offers a higher credit limit, it's crucial to avoid using the extra credit to overspend, as this could hurt your score in the long run.

Lower average age of your accounts

The age of your credit accounts is crucial in determining your credit score. Older credit accounts signal a longer history of responsible credit usage, which lenders tend to view favourably.

Just like, cancelling a credit card can also shorten the average age of your accounts and negatively affect your score, the same happens when you sign up for a new credit card. It lowers the average age of your credit accounts, which may result in a slight decrease in your credit score.

A shorter credit history is generally seen as risky by financial institutions. Therefore, maintaining long-standing accounts without closing them is important for preserving a good credit score.

How can getting a new credit card boost your credit?

Here’s how opening a new credit card in Singapore can offer several advantages that positively influence your credit score:

Better track record

Consistently making on-time payments with a new credit card helps build credit through a positive payment history. This track record of responsible credit management is an important factor in bettering your credit score over time. Lenders view timely payments as an indicator of financial reliability, which can facilitate future credit approvals.

Additional credit available on your cards

A new credit card increases available credit on your cards, which can lower your credit utilisation ratio, assuming your spending remains consistent. 

Credit diversity

Incorporating different types of credit, such as new credit cards, personal loans, or mortgages, can strengthen your credit profile. This variety shows lenders your ability to manage various forms of credit responsibly. However, it's important to note that the impact of credit mix on your score is comparatively less than factors like payment history and credit utilisation.

Key considerations before applying for a credit card

Before you apply for a credit card, here are the key considerations to ensure you qualify for the credit card that aligns with your financial situation and goals:

• Applicants must be at least 21 years old. 

• Most credit card lenders require a minimum annual income of S$30,000 for Singaporeans and Permanent Residents and S$45,000 for foreigners. 

• A positive credit history and high credit score can help. You must make bill payments on time and maintain a low credit utilisation ratio to improve your credit score.

Understanding these factors can help you make the right decision when applying for a credit card. To further assess your creditworthiness, consider using a credit score simulator to estimate your credit score based on your financial information. This credit score tool can provide valuable insights into your eligibility for various credit cards and loans.