Does applying for a credit card affect your credit rating?

Applying for your first or next credit card is an exciting process. However, it’s worth knowing the potential risks involved, particularly for your credit score, whenever you apply for any credit product.

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Applying for a credit card can affect your credit rating. The card issuer will perform a hard credit check on your credit file when you submit your application.

This is to assess your credit history and score, and to determine your history of making payments on credit products and your likelihood of paying off your credit card without trouble.

While being approved or rejected for a credit card may not impact your credit score, the application process can still take its toll.

The initial application

The process of an issuer performing a credit check on your credit file can lower your credit score, regardless of whether or not you gain approval. Any hard credit inquiry has the capacity to impact your credit score.

However, this change is typically temporary - especially if you gain card approval and begin to use it responsibly. Your credit score may only be lowered for a few months in some instances. In fact, paying off your credit card balance in full each statement period may help to improve your credit score over time.

Multiple applications

Every time you enquire about a credit product, it is recorded on your report. If you have multiple hard queries that appear on your report, lenders might perceive you as more irresponsible with finances and credit hungry.

For example, if you apply for a credit card and then two weeks later apply for a car loan, your credit score may have already fallen from the first credit inquiry.

Most significantly, if you apply for multiple credit cards at once, your credit score might take a hit. Several applications might indicate that you can’t keep up with your expenses and urgently need more money. These signs can indicate to lenders that you’re a high-risk borrower and make them wary of giving you credit.

In Australia, credit scores are calculated by three major bureaus – Equifax, Experian, and illion. Each uses a different scale: Equifax scores from 0 to 1,200, while Experian and illion both score from 0 to 1,000. However, all three divide scores into five tiers: Excellent, Very Good, Good, Fair, and Poor. 

Despite differences in scoring scales, your score is likely to fall within the same tier across bureaus. Typically, a score above 650 is considered “good,” while above 800 is “excellent,” though the exact figure can vary by agency and lender.

A good credit score can make it easier to get approved for credit products like home loans, car loans, and personal loans. On the other hand, a bad credit score can make qualifying more difficult. Achieving and maintaining a good credit score is generally considered a good financial practice, but it’s important to understand what factors contribute to your score.

Simply put, your credit score reflects your financial habits and history. While different credit reporting bureaus may calculate scores differently, common factors that affect your credit score include:

• Your repayment history (both positive and negative)
• The type and amount of credit you have applied for in the past
• The length of your credit history
• Negative events like defaults, court writs, or bankruptcies
• Opened and closed accounts, including bank accounts, loans, and credit cards
• Credit applications made by you, including any rejections, as well as the frequency of credit inquiries on your file

Are you wondering how you can keep your credit score in good shape and still increase your chances of getting approved for your credit card application? You may consider starting with:

Paying your bills on time

Your payment history impacts your credit score. Make sure you don't miss any monthly payments, whether it’s on a credit card or a loan, by setting up direct debits or reminders in your phone. This will also help avoid interest costs and late payment fees.

Pay off your existing debts

Before you apply for any credit product, it may be worth working on paying off your existing debts beforehand.

Your credit report doesn’t go into any detail about your spending or transactions. However, if you’ve maxed out your credit card, it will appear on your report, and it can prove to be a problem. This is also true of an outstanding car or personal loan, as the lender will factor in your repayments to these debts in your application, and may determine you cannot afford another credit product.

A debt consolidation loan or balance transfer credit card may come in handy if you’re juggling multiple debts at once. Keep in mind that there are risks associated with any credit products, and it’s crucial that you do your research before considering these options.

Monitoring your credit report

Any positive moves you make to maintain a good credit score might not be of much help if there's an error in your credit report.

Mistakes can happen to anyone at any time. Hence, thoroughly checking your report at regular intervals can help detect errors sooner so you can correct them and maintain a good credit score.

You can access a free copy of your credit report from one of the three credit reporting agencies in Australia once a year. You can also use RateCity’s Credit Score platform to quickly check your credit scores for free.