Why Is My Credit Score Low After Getting a Credit Card?
You were excited to get approved for your new credit card, until you noticed a credit score decrease immediately following your approval. Here's what's going on.
Contributing Writer at Tally
January 26, 2022
When you've built a good credit score and get approved for that credit card you've been hoping for, you may be shocked to see a slight dip in your FICO score after approval. This can leave you wondering, "why is my credit score low after getting a credit card, and is it permanent?"
Learn why your credit score dropped slightly with the new credit card account, why it's nothing to be alarmed about and how your credit score can rebound with on-time payments and time.
Why did opening a credit card drop my credit score?
Opening a new credit card account immediately impacts two smaller factors in the FICO scoring algorithm: new credit and length of credit history.
New credit impact
The new credit variable in the FICO credit scoring model considers a few factors, including:
How many hard inquiries you've had on your credit in the last 12 months
How long it's been since you opened a new account
How many new accounts you have
When you open a new credit card, the card issuer will typically have you complete a credit application and perform a hard credit inquiry, which is one negative strike.
Once the new account hits your credit report, you both reset the clock for how long it's been since opening a new account and add another new account, which may be two more negative hits to your credit score.
Fortunately, the new credit variable only holds a 10% weight on your overall credit score, so, while its impact is immediate, it's also relatively small.
Length of credit history impact
The length of credit history factor looks at three key items when helping determine your FICO credit score:
The age of each of your credit accounts, your oldest account, your youngest account and the average age of all your accounts
How long accounts have been open
How long it's been since you’ve used each account
Essentially, the FICO scoring model wants to see accounts open and active for a long time. Opening a new account negatively impacts all three key areas, which can result in a credit score drop.
The length of your credit history only accounts for 15% of your credit score, so its negative impact shouldn't be too significant.
Is this negative credit score hit permanent?
Fortunately, negative marks are generally not permanent in the FICO scoring model. Even something as serious as bankruptcy will drop off your credit report after about 7 years. So, this negative hit from getting a new card will be a temporary thing.
First, the FICO scoring model only looks at hard credit inquiries over the last 12 months, so that small hit will fall off in about a year. Then, as the account ages and remains active, it'll start helping improve your credit score via the length of credit history factor.
Is there anything good about opening a new credit card account?
Yes, good things can come from opening a new credit card account. First, it may give you access to rewards points you haven’t had before and a more flexible payment method.
These are subjective benefits, though. There's a handful of objective positives a new credit card may have on your FICO score over a longer term.
When opening a new credit card, the big positive to your FICO credit score is its impact on the amounts owed factor.
The amounts owed factor looks at five key areas:
How much you owe on all your accounts
How much you owe on the various types of credit, such as installment debt (e.g., student loans, personal loans, auto loans, mortgages, etc.) and revolving debt (e.g., credit cards and lines of credit)
How many of your accounts have a balance
Your credit utilization ratio — your credit card balances relative to your total credit limits — on your revolving debts
The accounts owed factor accounts for 30% of your credit score, and much of that weight comes from your credit utilization rate. Once your new credit card limit hits your credit report, this could cause a significant upswing on your credit score and potentially return the points lost when you opened the account. This may even bring your score higher than before you opened the account.
For example, if you had $4,000 in credit card debt with a combined $10,000 credit limit, you had a 40% credit utilization ratio. That's a fairly high ratio and could negatively impact your credit score. If your new credit card has a $4,000 credit limit, you now have a combined $14,000 credit limit, dropping your credit utilization ratio to just 28.6%.
If this is your first credit account, you now have a fresh opportunity to build a stellar payment history with on-time payments, which is the top factor in your FICO score at 35%.
If you use your new card responsibly by not spending beyond your budget and paying off the entire balance by the due date every month, you may be on your way to an excellent credit score.
While credit mix accounts for only 10% of your FICO credit score, it is yet another potential longer-term positive on your credit report.
The credit mix factor looks for a reasonably even mixture of credit types — installment loans and revolving credit. The FICO scoring model views an even mix as an indication you can manage multiple types of credit at once, which increases your score.
If your credit is all installment loans, opening a new credit card could boost this factor a bit. At a 10% impact, it likely won't make up for the negative hits from opening the new account, but it may reduce the impact slightly.
Why is my credit score low after getting a credit card?
Your credit score dropped after getting a new credit card for a few reasons:
The credit card company performed a hard inquiry to verify your creditworthiness.
Once you were approved, the credit card issuer reported the new account to the three main credit bureaus — Experian, Equifax and TransUnion.
This action further impacted your new credit and length of credit history factors, effectively reducing your credit score.
Fortunately, you can eventually wipe out these negatives, as the new account can eventually help with your credit utilization ratio, payment history and credit mix. With time, you should slowly see these increases wipe out the initial decrease triggered by opening the account.
For more personal finance tips on building credit and debt payoff delivered straight to your inbox, sign up for the Tally† newsletter.
†To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) will be between 7.90% and 29.99% per year and will be based on your credit history. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 to $300.