Want to build credit? The best way is probably going to be by applying for one new card every six months (give or take a few months—it doesn’t need to be precisely this long). While this may seem excessive, it actually is a great rule of thumb to live by because of how credit scores are calculated.
Won’t applying for too many credit cards lower my score?
When I was 18 years old, this is what I thought, and as a result, I was always hesitant to apply for new credit accounts. However, this ended up being false, and it’s because I had the following common concerns over how my credit score might drop because of applying to a new credit card:
- Hard inquiry will lower credit scores
- A new account lowers the average age of credit accounts on an individual’s credit file
- Applying for too many credit cards at the same time can be alarming to a credit card issuing company
- Opening a new credit card costs money
However, here’s why these concerns are mostly irrelevant.
Hard inquiries aren’t as bad as you might think they are
A hard inquiry will temporarily lower your score for like 3 months maximum, so you can chill about that, lol
Average account age is a long-term investment; be a tortoise, not a hare
If you never apply for more credit cards in an effort to raise your average account age, it will only hurt you in the future when you actually need the card. It is a fallacy. If you disagree with this assertion, let’s explore why with two scenarios, one labeled tortoise and one labeled hare:
- Tortoise: Let’s say you apply for one card every six months between 2020 and 2030. In 2030, the average age of your 20 accounts is 5 years, which is considered young. Your average age is currently on the lower side because you are still in the credit-building phase. But let’s say in 2040, you apply for 5 more credit cards in the same year. Before you applied, the average age was 15 years. Now your average is 12 years. Not too bad of a drop; it’s been propped up by all the accounts you opened between 2020 and 2030.
- Hare: Let’s say you applied for only one card in 2020. In 2030, the average age of your 1 account is 10 years. In 2040, the average age is 20 years. Congratulations, your average account age has surpassed that of the tortoise so far, so you are ahead. But if you apply for just one credit card in 2040, your average age suddenly drops to 10 years. If you apply for 5 credit cards in total in 2040, your average age just dropped to 3 years 4 months! You will have to wait almost 20 more years for your average age to go back up to 20 years. Now, you are way behind the tortoise, and there is nothing you can do about it, because you can’t turn back time.
As long as you don’t close old accounts, your accounts that are kept open will help prop up your average age. It ages like wine.
You might say, “oh I’ll just apply to one credit card right now and I won’t need another one, ever!” Well, that’s probably not true, because there will always be a credit card you might need to end up applying for in the future, and plus, you are saying goodbye to free money AND credit-building opportunities by doing that. (Free money because you miss out on sign-up bonuses, and credit-building because each new card increases your credit limit, which is good for decreasing utilization percentage.)
You might also say, “but I am in my 20s and need a mortgage now, not in 20 years!” Okay, but there’s also no way for you to get your average account age to 20 years by your own means, because you could only start applying for accounts less than 12 years ago, when you turned 18. A high average account age matters for those who can have them: people over 35-40. And there’s no way they could achieve that by their own means if they didn’t apply for cards early on in their adulthood.
There’s a difference between applying recklessly and applying often responsibly
Applying to 5 credit cards in the span of less than 1 month is definitely cause for concern. That may imply you’re broke and trying to get lines of credit to borrow on, only to not pay the debt back anytime soon. But one new card every six months is not an issue as long as you actually use the most recent card you got approved for and demonstrate at least 3-6 months of on-time payments for it. If you do that, it becomes clear your previous new card wasn’t used for carrying a balance, and therefore it makes credit card issuers a lot more comfortable with issuing you a new credit card, even if your last one was opened 6 months ago.
One rule of thumb you might want to keep in mind about applying too often is: you shouldn’t be breaking Chase’s 5/24 rule. They reject applicants who have already opened 5 accounts within the past 24 months. Applying for a new card once every 6 months won’t ever put you above 5/24.
Credit cards don’t have to cost money; in fact, most of them don’t
Some people get scared at the idea of applying for a new credit card because of its annual fee. The thing is, many credit cards don’t have annual fees! You certainly should not be keeping too many credit cards open that have annual fees, but the simple way to fix this problem is to… apply for credit cards that don’t have annual fees!
Should I apply just because, or does it help me build credit or earn bonuses?
Now that you see why the excuses are wrong, here’s why it’s still better to apply for them than to simply avoid applying at all:
- Each new account raises your overall credit limit. When your credit limit is higher, the utilization rate is lower for the same amount of money owed. When your utilization rate is lower, your score is higher.
- Let’s say each month, you spend $2,000 on your credit cards before you pay them off. This is constant because you need to get groceries, dine at restaurants, run errands, etc. If your overall credit limit is $5,000, your utilization is 40%, which might cause your credit score to drop dozens of points!! On the other hand, if your overall credit limit is $40,000, your utilization is only 5%, which keeps your credit score high.
- Utilization is a highly influential factor in determining your credit score, and because it keeps changing, you never want your utilization to be higher than 10%, especially when you’re applying for a mortgage or auto loan
- The more accounts you have, the better it is for your credit score.
- If you have fewer than 21 open credit accounts, it technically lowers your credit score because you are considered to not have enough accounts open. While this impacts your score only modestly, it still means a lower score.
- The earlier you apply for accounts, the better it will be for your average account age in a decade or two.
- Again, as mentioned earlier, this is an investment for the future. Taking a temporary dip right now will help you raise your credit score in the future.
- The more credit accounts you have open that are paid on-time, the more likely it will be that credit card issuers will open a new card for you.
- Credit card issuers don’t just look at your score and make a determination. One of the other factors is taking a look at all of your current credit accounts. The more amount of credit accounts you have, and the more on-time payments you have, the better that looks for you.
In short, when you apply often but show a consistently responsible pattern of spending and then immediately repaying your debt, it actually increases your creditworthiness than if you only applied for a new account once every few years. If you only have a few accounts, there isn’t enough data for credit issuers to make a well-informed decision on whether to issue you a credit card, and it might even result in a rejection due to not having enough credit history. Conversely, this won’t be an issue for people who have lots of existing credit accounts that they responsibly pay off.
In regards to regularly earning sign-up bonuses, keep reading to see whether that’s a good idea or not.
Is there ever such a thing as too many credit cards?
It may be true that credit card companies can close accounts they believe are not being used anymore, as it may represent a liability to them in case you suddenly need to max out your credit cards and you come back to carry balances on your old credit cards. As long as you remember to make a few transactions on each of your cards on occasion, this won’t be a problem. Plus, remember how having fewer than 21 credit accounts is considered “not enough” by credit bureaus? Most people think 10 credit cards is “too many”, so it’s important to frame it in the context of the bureaucrats making the decisions, not our personal feelings.
Can I apply for a new credit card regularly to take advantage of their sign-up bonuses?
You sure can, and you can even do so responsibly, both earning rewards and keeping a good credit score. This is called churning. There is a subreddit called r/churning; you should take a look at it if you’re interested in methodically planning how to do this. Warning: I know churners and they take this very seriously! I’m talking about them having Excel sheets to plan out their next 5 credit cards to apply for in the next 3 years.