Shopping with a credit card comes with a lot of benefits, from fraud and purchase protection to valuable rewards. And when card companies are constantly wooing you with major spending bonuses and flashy perks, it can be tempting to jump on every offer to take advantage of it all. But should you? Before you add to your plastic arsenal, consider whether or not it’s really the right time.
Give yourself time to get comfortable with your first card
According to NerdWallet, applying for a credit card when you only recently opened one can signal to credit agencies that you’re a risky customer — and because they don’t want to give cards to people who can’t pay their bills, they may reject your application. Not only that, but opening a new card can temporarily lower your credit score; so particularly if you’re new to building credit or you’re trying to improve a low score, it’s a good idea to space the applications out. NerdWallet recommends waiting about six months between applications, or longer if you have an average or poor credit score.
And if you’re only on your first credit card, Alison Norris, CFP® and advice strategist at SoFi, a personal finance company, recommended you give yourself a full year. “That just ensures that you’ve developed the right spending habits and mindset so you can take full advantage of the second card before you...leap into additional lines of credit without intention,” she said.
Consider your needs and reasoning
Opening an additional card can be a positive move in terms of diversifying the benefits you receive from each one, Norris said. “If you review your past spending...and you see that, for example, you spend a lot of money on airlines but you don’t currently have a card that provides any benefits for those special purchases, that might be an opportunity to take advantage of spending that you already [do],” she said. “You can align your past spending habits and do a cursory review of your budget with the cards you have today, and see if there are any deficiencies and [if] you’re really getting the biggest bang for your buck.”
In general, Norris recommended thinking through how you would use your additional credit card and what potential benefits you’d get from it before submitting the application. Do those benefits outweigh the annual fee, or the potential negative impacts a new card could have on your credit score? If not, it’s probably not the best time to take that step.
Review your credit score and spending habits
Sure, it would be great to get extra points for airline tickets you’re already buying — but not if it comes at the cost of your credit score. Opening a new credit card can temporarily lower your FICO score, which takes into account your average credit history length. “By opening up a new card...you have a newer line of credit, which could slightly reduce your score,” Norris said. The reduction may be temporary; but if you already have a low credit score or are planning to apply for a significant loan, it’s best to wait and take time increasing your score so it doesn’t impact your applications or interest rates. CreditCards.com recommends waiting a year after opening a new credit card before you apply for a loan.
On the flip side, if you already have a high score and are not applying for loans anytime soon, opening a new card can be beneficial — particularly if you can decrease your credit utilization rate (or credit utilization ratio), which looks at how much you spend compared to how much credit is available to you. So if you have a $10,000 credit limit on each card, but you only spend $2,500 each month, your utilization ratio will be 25 percent. “Generally, when you open up more cards, you now have more money available to spend,” Norris said. “So you’re lowering your credit utilization ratio and possibly improving your credit score.”
Avoid opening credit cards if you’ll max them out
On the flip side, maxing out your cards will result in a high credit utilization rate, which can negatively impact your credit score — as can carrying a balance from month to month if you’re not able to pay your full bill. “Ideally, you would not be using your full line of credit; and a rule of thumb...is to spend below 30 percent of the credit amount available to you,” Norris said. She added, If you can’t pay your full balance every month or “you run the risk of spending up to the maximum amount that you can borrow, adding another credit card is not the best solution; and there are alternatives that can not only help you pay off your debt quickly, but also improve your credit score.”
If you’re struggling to pay off your first credit card, for example, Norris recommended looking into the possibility of a personal loan before opening another card. “With a personal loan, you have a defined payoff term, a set interest rate and you know exactly what you need to do to pay off the debt,” she said. As you pay off that loan responsibly, you can build a positive credit history and ultimately increase your score.
Review your spending history and make sure you have a well-defined budget, so that you know whether or not you can responsibly manage an additional card before you open one.
“Credit cards...when used responsibly can be a really amazing tool,” Norris said. “But if you’re struggling to stick to a budget, adding another card is not the best path forward. You should really look before you leap and make sure that the perks or an additional high spending amount would not enable bad spending habits.”