Credit score dropped 100 points after opening credit card

Opening, or simply applying for, a new credit card can temporarily ding your credit score. But getting a new card can also come with a few advantages for your credit, such as raising your credit limit. Here’s what to know.

How applying for a credit card can hurt your credit

When a card issuer looks at your credit information because you’ve applied for a credit card, it is a so-called hard pull. That can lead to a slight drop in your credit score, whether you are approved or not. A hard pull, or hard inquiry, stops impacting your credit score in a year or less, but it stays on your credit report for about two years.

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How opening a new credit card can hurt your credit

Applying for a new card can cause your score to slip a bit, but getting a new card can result in a bigger drop if you use a lot of that new line of credit. Or if you have only one or two other cards, and they are only a few years old.

Here’s how opening a new card might hurt your credit:

Higher balances

A new credit card might hurt your score if you make a big purchase or get a balance-transfer card and transfer your higher-interest debt to the card so that you have high credit utilization. The amount of your credit limit that you use is weighted heavily. Credit utilization is calculated both per-card and overall.

Experts recommend going no higher than 30% on any card, and lower is better.

However, it’s smart to look at overall finances, not just your credit score. Accepting a drop in your score due to high credit utilization because you got a 0% balance transfer card deal to pay off debt may be worth it.

Lower average age of accounts

How long you’ve had credit also affects your score. Your new card can reduce the average age of your credit. If you have few credit cards, it will have a bigger impact than if you have many.

Length of credit history, however, is a relatively minor factor in credit scores. It counts as 15% of your FICO score. VantageScore, another credit score provider, lists “depth of credit,” the age of your credit accounts, as making up 21% of your VantageScore 3.0 score.

How opening a new card can help your credit

A new line of credit can also help your credit profile.

A better track record

Paying on time, every time is essential for good credit. FICO, the credit score used most for credit decisions, says payment history accounts for 35% of credit score. Competitor VantageScore says it makes up 40% of your 3.0 score.

If you’re trying to build credit, nothing is more important than consistent, on-time payments. A new account gives you another opportunity to build up a record of on-time payments.

More room on credit cards

A new card will increase your overall credit limit. If your spending stays the same, your overall credit utilization will be lower, and that could help your score.

Credit diversity

Credit scores award points for showing you can manage more than one type of credit. If you have an installment loan but do not have an existing credit card, successfully managing your new credit card is likely to help. But if you already have several credit cards, adding one more is not as likely to have much of an impact.

There are general guidelines you can follow to build your credit score. But what's often overlooked are the actions you take that actually ding your score, even if you were doing something you thought was positive.

The good news is that many credit score dings are temporary and can be easily recovered. And oftentimes, actions like paying off a loan or applying for a new credit card will benefit you in the long term once you get past the initial fluctuation. 

Below, CNBC Select outlines the five ways you may be causing your credit score to suddenly drop — whether you realize it or not.

1. You applied for a new credit card

Card issuers pull your credit report when you apply for a new credit card because they want to see how much of a risk you pose before lending you a line of credit. This credit check is called a hard inquiry, or "hard pull," and temporarily lowers your credit score a few points. Hard inquiries remain on your credit report for two years, but FICO (which most lenders use) only considers inquiries from the last 12 months when calculating your credit score.

But hard inquiries on your credit report aren't necessarily bad when they happen in moderation. After all, applying for credit cards is a great first step in building credit. When you use credit cards correctly — by charging purchases and paying them off in full by the due date — they can help increase your credit score. If you're looking to build credit, consider the Petal® 2 "Cash Back, No Fees" Visa® Credit Card, which offers cash back, or the Capital One Platinum Credit Card that is designed for average credit applicants.

To reduce the number of unnecessary hard pulls on your credit report, check if you qualify for a new card by using issuers' preapproval or prequalification offers. These won't guarantee that you'll be approved for the specific credit card, but they'll give you a good idea.

When it comes to actually applying for new credit products, be sure to spread out your credit card applications over time. Only apply for a new credit card every three months, and maybe wait even longer between applications if you have a lower credit score.

2. You charged a large purchase onto your credit card

Credit cards are convenient for making large purchases because you don't need to pay all the money upfront, but leaving a high balance on your card will report a higher credit utilization rate (CUR) to the credit bureaus.

Your utilization rate, or your debt-to-credit ratio, measures how much credit you use compared to much you have available. You want to aim for a low utilization rate because using too much of your available credit limit shows that you pose a financial risk to issuers. Experts recommend keeping your credit utilization below 30%, with some even suggesting below 10% to get the best credit score.

Before you charge a hefty expense onto your credit card, make sure you can pay it off in full before the billing cycle ends. Carrying a high balance on your credit card is not only bad for your credit utilization rate, but it will also incur a whole lot of interest. 

3. You missed a credit card payment

Because your payment history is the most important factor that determines your credit score (making up35% of your FICO score calculation), missing a credit card payment will have an immediate negative effect on your score. Needless to say, lenders and issuers care a lot about whether you've paid your past credit accounts on time because they indicate your risk.

According to FICO data, a 30-day missed payment can drop a fair credit score anywhere from 17 to 37 points and a very good or excellent credit score to drop 63 to 83 points. But a longer, 90-day missed payment drops the same fair score 27 to 47 points and drops the excellent score as much as 113 to 133 points. In other words, the higher your credit score, the greater the negative effect will be.

How quickly your score bounces back after a missed payment varies depending on your credit history and your payment behavior after you miss a payment. If you jump back on track quickly after, it's likely your score will start improving along with your good payment history. A history of on-time payments is vital to a good credit score, and it's even better if you can pay them in full.

4. You paid off a loan

While paying off your credit card debt can increase your credit score, paying off installment debt, such as a mortgage or a student loan, has the opposite effect. 

Paying off something like your car loan can actually cause your credit score to fall because it means having one less credit account in your name. Having a mix of credit makes up 10% of your FICO credit score because it's important to show that you can manage different types of debt.

Don't let this prevent you from paying off your loans, however. Being debt-free will help your overall financial health, and it makes no sense to pay unnecessary interest charges over time just to save a few credit score points.

5. You closed your credit card

Closing a credit card account, especially your oldest one, hurts your credit score because it lowers the overall credit limit available to you (remember you want a high limit) and it brings down the overall average age of your accounts. The length of your credit history makes up 15% of your FICO score, which is why experts recommend building credit at a young age. The longer you can show you have had credit, the better for your credit score.

The exception to this is if you are paying for a credit card that you no longer use. In today's world where travel is nearly nonexistent, that may mean closing your luxury travel credit card with a steep annual fee, like the Chase Sapphire Reserve®, which new cardholders pay $550 per year for. It could also mean closing your secured credit card that you paid a deposit for to receive a credit limit, such as with the Capital One Platinum Secured Credit Card.

Before closing your card, talk to your issuer and see if you can either downgrade to a no annual fee card or, in the case of a secured card, upgrade to an unsecured credit card. This could help you preserve the credit line so that it doesn't show up as being closed on your report, while getting you a card that's better suited for your needs.

Information about the Capital One Platinum Credit Card and Capital One Secured has been collected independently by Select and has not been reviewed or provided by the issuer of the card prior to publication.

Petal 2 Visa Credit Card issued by WebBank.

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.

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