Recently Ratehub.ca introduced their compare all credit cards site, which is a great way for consumers to figure out which credit cards benefit them the most. By simply inputting your spending habits, the tool makes it easy to decide which credit card to apply for.
It also became popular for those who are into churning credit cards. If you’re not familiar with churning, it’s when you apply for multiple credit cards just to take advantage of promotions and signup bonuses. Those signup bonuses can be quite valuable so it’s no surprise that credit card churners are always looking for their best options.
Whether you’re applying for your first credit card or applying for 5 a year, maintaining a good credit score needs to be made a priority. Every time you apply for a credit card, an inquiry is made on your credit history, but that’s not the only thing that affects your credit score.
Understanding Credit Inquiries
A credit inquiry basically means someone has looked into your credit score. They come in two forms: soft and hard. One will actually lower your credit score, the other doesn’t.
Hard inquiries: Every time you apply for a credit card or loan, a hard inquiry is performed. This inquiry is performed as a detailed way to look at your credit history to determine if you’re worthy of getting more credit. Based on what your history shows, you’ll either be approved or denied. Unfortunately, every time a hard inquiry is performed, a drop in your credit score of 5–10 points will happen.
Soft inquiries: On the other hand, soft inquiries have no effect on your credit score, but it still plays an important role. Soft inquiries are performed to find out what your credit score is. With that information, your bank may pre-approve you for a loan or offer you an increased limit on your credit card. No permission is required to perform a soft check and you won’t even know when it happens. It doesn’t affect your credit score so it’s really not a big deal.
So why does a credit inquiry affect your credit score? As far as the reporting agencies are concerned, an application for credit is a sign you need money fast. This might not sound fair since every situation is different, but that’s just the way it works.
Does It Matter?
Yes and no—it all depends on the circumstances. Regardless of your credit situation, a few things are certain when you apply for new credit.
If your credit score is in good standing, a drop of 5–10 points really won’t matter. If you’re approved for that credit and you make your payments on time and in full, your credit score will return to normal after just a few months. In addition, any credit checks will fall off your record after two years. Again, if you have a good track record with credit then minor drops should be of no concern.
That being said, even if you have an outstanding credit history, you can still hurt yourself by applying for too many credit cards in quick succession. The credit reporting agencies will seriously question why you’re requesting so much credit so quickly; they may think it’s a sign that you’re currently experiencing some kind of financial trouble.
You might simply be churning a few credit cards or you might be in the process of replacing your credit cards, but the reporting agencies aren’t aware of that. If you plan on applying for a mortgage or a line of credit in the near future, it’s probably best to limit the inquiries on your account since too many hard inquires is a strong enough reason to reject you for a loan.
So is signing up for multiple credit cards and churning points worth it? That’s a question you need to ask yourself. Even though your credit will return to normal eventually, it might not be worth the hassle. For some people, having more than two credit cards presents a dangerous situation since it can be incredibly easy to go over-budget.
If you want to find out what your credit score is, you’ll need to pay Equifax or TransUnion for that knowledge, but you can request your credit report from either one of them for free.
Flickr: Sarah Reid
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