Getting approved for a new credit card is exciting; but, if you rack up big charges on that new card, your credit score will suffer.
Don’t Spend Big Bucks Right Away
When you open a new credit card, it’s a new account. Adding a new credit card account to your credit history will actually help build your credit scores because it’s viewed as additional payment history, even though a payment may have not yet been reported. Once monthly payments are reported on your credit report, your scores will continue to improve. However, if you carry a large balance on this new card, it will greatly reduce your credit scores. Why? Because it’s a new account and is treated as new debt…affecting your scores significantly. Keep in mind: new debt = new risk.
How Much is a Big Balance?
This depends on your overall payment history and the amount of debt on your credit report. What if you don’t have many accounts that show on-time payments being made for at least 2 years? Or what if your payment history doesn’t show that you’ve carried a lot of debt in the past? Well, then even adding $2000 of debt onto a new credit card could easily drop your credit scores by 50 points or more. On the other hand, if you have 4+ open accounts that are several years old, then adding $2000 of new debt may only drop your scores by 10-15 points. As the account ages, the negative impact of that debt will diminish. For smaller debts, it usually takes about 4-6 months. For larger debt amounts, it can take up to a year before the negative impact on your scores is gone.
Credit Card Debt is a High Risk
Anytime you add any new debt to your credit report, your scores drop. The impact of new revolving debt is greater than a new auto loan or mortgage. Revolving debt is considered a higher risk to the creditor for two reasons: (1) because there’s no collateral, and; (2) revolving accounts are generally used for current expenses – which if you carry large balances on newer cards, it may be a demonstration that you’re living beyond your means.