- Opening a new credit card can impact your credit in several positive and negative ways.
- When used correctly, the right credit card can help you boost your credit score, save money, protect your finances, or earn rewards.
- Avoid new credit cards if you are struggling to get rid of your existing debts.
It’s difficult to live a modern life without the convenience and safety of credit cards. However, this convenience can set a nasty trap for inexperienced money managers. The key to deciding if you should open a new credit card is to determine what you’re trying to accomplish and if a new card can achieve that.
6 reasons to open a new credit card
Credit cards are big business, and you may get offers every week in the mail, online, by text or through social media. Before clicking that “Apply Now!” button, determine what needs that card is supposed to meet and if it’s the best option.
1. Build credit
Credit cards help you get a credit score so future lenders will see your track record. Charging small amounts each month builds a history of on-time payments on your credit report. You don't need to commit to a high payment and a large loan—like you might, for instance, with auto financing.
It’s a low-stakes way to get used to managing credit.
How do you qualify for a credit card to build credit? The most common types are:
Secured credit cards (you need to make a cash deposit, but it’ll be returned to you after a period of responsible card use)
College credit cards (designed for applicants enrolled at an approved institution, and if you’re under 21 you’ll need to show proof of sufficient income)
Second chance credit cards (these may be secured or unsecured and are designed to help you establish or reestablish credit history)
Store credit cards (these traditionally have less-stringent approval criteria and are limited in how they can be used)
The right type for you depends on your situation—your employment, education, and previous credit experience.
2. Reduce credit utilization to raise your credit score
One of the most influential factors in credit scoring is credit utilization, aka “amounts owed” or “balance to limit.” It’s the total amount you owe on your credit lines divided by the total of your credit limits.
Generally speaking, the lower your utilization, the higher your score (and vice versa). The best utilization is zero. The worst is 100%.
There’s no magic line where utilization goes from being good to bad, but you'll start to see a negative effect on your credit score once your utilization reaches or exceeds 30-35%. After that, the higher it is, the more points you’ll lose. Any time you max out a credit card, even if you have others that aren’t maxed out, your credit score will suffer.
Utilization is calculated for each card and overall. Opening a new credit card can help you if you don’t use the new credit limit. In other words, if you currently have a credit card with a $900 balance and a $1,000 credit limit, your utilization is 90% (bad). If you open a new credit card that also has a $1,000 limit but you don’t make any transactions, your overall utilization is now 45% (much better).
900/1000 = 90%
900/2000 = 45%
But having one card close to maxed out is still going to hurt you. It would be even better if you can transfer half of your balance over to the new card so that each one has a 45% utilization. Then pick one to focus on and work like heck to pay it off.
Lowering your credit card balances is an excellent strategy to raise your credit score as long as it makes sense financially. If you’re paying down debt, avoid cards with annual fees.
3. Cover emergencies
Everyone should have an emergency fund. However, saving the amount you need can be difficult, especially if your regular expenses consume much of your income. One way to protect yourself from unexpected costs until you can save enough is to line up a credit card. Keep it in reserve and unused unless you need it.
Shop carefully to get the best interest rate you qualify for, and consider the minimum payment. True emergencies are valid reasons to charge for something you can’t pay off immediately. If you must pay medical costs or finance a necessary car repair, you want to avoid a high-interest rate and a payment you can’t afford.
4. Spend safely, and conveniently
Credit cards make it safer and easier to shop online, pay at the pump, or get through a self-checkout quickly.
You can make purchases in other countries without exchanging currency. Your purchases may get extra protection or extended warranties for free. And all isn't lost if someone steals your wallet.
If you’re just looking for convenience and don’t plan to carry a balance, choose a card with the perks of your choice: cash-back, rewards, extra purchase protection, club memberships, etc. Watch out for fees. You don’t have to pay an annual fee to get perks.
5. Take advantage of rewards and signing bonuses
Some reward credit card issuers are very generous with their bonuses for new customers. If you’re comfortable managing your credit—and the cash, travel, or other rewards are especially compelling—go for it.
Here are a few guidelines: make sure that the bonus isn’t offset by expensive fees and that the rewards work with your spending habits and lifestyle. You can’t apply for every offer without damaging your credit, so be choosy when you apply. And maximize the benefit by paying off your balance in full every month. If you don’t, the interest you pay is almost sure to be more than the rewards you’ll earn.
6. Refinance or consolidate existing debt
What if you had to take out a fast but expensive personal loan? Or have several card balances with high-interest rates? Maybe your credit score has improved to the point that you are eligible for premium interest rates or a zero-interest introductory period.
Balance transfer credit cards can help you pay off your debts faster by reducing or eliminating interest for six to 24 months. You can use them to make a serious dent in your debt.
Read the fine print and understand costs like balance transfer fees, which offset some of your savings. Know how long you have at the introductory rate and what happens when that period expires.
3 reasons not to open a new credit card
While the reasons for getting a new one can be compelling, they might not apply to you. And there may be excellent reasons to avoid applying for a new credit card.
1. You have several cards already
According to credit reporting agency Equifax, most people only need two or three credit cards to have excellent credit. Equifax also lists “too many accounts with balances” as a common reason for low credit scores. Although they also note that the reason most people shouldn’t have too many cards is that they become difficult to manage, which ups the odds of missing a payment.
Another issue is the number of credit inquiries on your credit report. Every time you apply for a new account, the issuer pulls your credit score, and you lose a few points from your credit score. It takes about a year to recover those points. Additionally, applying for too many cards too quickly can scare lenders. That’s because, statistically, consumers with many inquiries are more likely to default on loans or file for bankruptcy.
2. You plan to apply for a loan
If you have a good credit score and history, don't open new cards if you plan to apply for a mortgage, auto financing, or business loan in the next year. Every credit inquiry lowers your score. And having access to too much credit can raise red flags from underwriters if they think you are at risk for running up debt that will leave you unable to afford your payments.
3. Your balances are increasing
Don’t carry credit card balances from month to month because it’s a very expensive way to pay for purchases. And credit card interest rates are variable. When interest rates rise, and they do rise periodically, your payments can become unaffordable.
When your balances are increasing, it can seem appealing to apply for more credit so you can keep on spending. However, that’s not a sustainable practice. You need to reduce your spending and step up your credit card repayment strategy.
How does opening a new credit card affect your credit?
The effect of a new credit card depends on your situation. Here are the most common side effects when you apply for a new credit card:
Inquiries hurt. Every application, when the issuer pulls your credit report, generates a hard credit inquiry. These can temporarily knock a few points off your credit score. Don’t apply too often, and don’t apply if you’re not sure you’ll qualify. Applying when you’re pre-approved can be useful because pre-approval usually means you have a decent chance of getting a card.
Available credit helps. Increasing your available credit by adding a new card lowers your credit utilization ratio. Credit utilization is a big deal where your credit score is concerned, so use it carefully—in a way that doesn't increase balances on the new card.
Open credit can cause concern. Having enormous amounts of available credit or many credit cards without balances doesn’t harm your credit score. But it can alarm loan underwriters because they look at your credit report, not just your score.
Downward balances help. The most modern versions of credit scores award points if your balances are generally moving down, and not up. Pay more than the minimum when you can, and make sure payoff is always your goal. Ultimately, how you use the account affects your credit score more than the card application.
How many credit cards should you have?
According to Equifax, you can have excellent credit with two or three credit cards. Having a few more cards doesn’t necessarily hurt your credit score unless you find them hard to manage, and that causes you to miss a payment.
Can you open a new credit card during debt settlement?
You can open a new credit card during debt settlement, as long as you can convince the credit card issuer to approve it. However, approval with a traditional credit issuer is extremely unlikely. That’s because consumers going through debt settlement often have a history of missed payments and possibly even collection accounts. Also, settled debts are reported as settled. That tells other creditors that you didn't fully satisfy your debt. You may have better luck getting a secured credit card with a cash deposit.
Can you open a new credit card after debt settlement?
Many people open new credit cards after completing a debt settlement as part of the credit rebuilding process. If you don’t immediately qualify for a new regular credit card, try secured or second-chance credit cards to help you reestablish a good credit history. And eventually, with good payment habits, you’ll improve your credit score and can apply for traditional credit.