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When you apply for new credit, you likely have a reason why — whether it's financing a home or getting out of debt with a balance transfer. Once you decide the reason, you should consider the effect a new credit application has on your credit score before applying.
"It's hard to say exactly how many points a credit score may decrease from a hard inquiry, as it depends on an individual's unique credit history," Rod Griffin, director of public education for Experian, tells CNBC Select.
Below, CNBC Select explains the effect a new credit application has on your credit score and if it hurts your credit.
When you submit a new credit application, whether it's for a credit card or loan, there may be some affect to your credit score if the lender does a hard inquiry into your credit history.
Most credit applications result in a hard inquiry, which means the lender pulls your credit report from one of the main three credit bureaus, Experian, Equifax or TransUnion. Hard inquiries can cause your credit score to fluctuate slightly, compared to a soft inquiry, which doesn't pull your credit and has no effect on your score.
"Not all inquiries will have a measurable impact on your scores," John Ulzheimer, formerly of FICO and Equifax, tells CNBC Select. "But, if an inquiry is causing a score to be lower it's no more than a few points."
If your credit score drops a few points, you may wonder how quickly you can expect it to rebound. Thankfully, "score changes due to inquiries are usually minimal and scores recover quickly," Griffin says.
When I recently applied for the Chase Sapphire Reserve®, my score dropped 5 points the day after I applied and rebounded soon after. In a little over a month, my credit score increased a total of 19 points (net 14 with the 5 point decrease). Take note, I was approved for a generous credit limit and paid off balances on a 0% APR card, which could be part of the reason my score increased.
It's also important to note that inquiries are the least influential factor of credit scores, and both Griffin and Ulzheimer explain an inquiry will never be the sole reason your application is declined. Lenders consider various factors when making approval decisions, such as your income and payment history.
"Having said that, too many inquiries within a short period of time may be seen as a sign of financial stress and can therefore negatively impact your credit," Griffin says.
A new inquiry remains on your credit report for two years, but over time their impact lessens.
"Typically, the impact of inquiries begins to decline after a month or two," Griffin says. "By that time, there will either be a new account that then represents credit risk or there will be no new account, indicating the inquiry no longer indicates any additional credit risk."
"The impact [of a new inquiry] cannot last more than 12 months because both FICO and VantageScore ignore inquiries after they've become one year old," Ulzheimer says.
If you want to reduce the amount of inquiries you have on your credit report, consider checking out prequalification forms. Many lenders have prequalification forms for credit products, such as credit cards, that allow you to check your likelihood of qualifying for a card with no harm to your credit score.
For instance, if you want to open a cash-back card, but are deciding between the Chase Freedom Unlimited® and the Citi® Double Cash Card, you can first check if you prequalify for the cards. This can help you shop around for the best offer without hurting your credit score.
Keep in mind that prequalification is not a guarantee of approval and you will need to submit an official application if you want to apply for a card. The formal application will likely result in a hard pull of your credit history, and therefore an inquiry on your credit report.
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