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Overview
A sampling of new credit-card offers

New plastic can ding your credit score

Last reviewed: August 2011
Open wallet
Photograph by Veer.com

The great credit squeeze? No longer. Now credit-card companies are trying to lure creditworthy customers—including some who had their credit lines slashed during the recession—with sweet introductory deals. Those offers include cash, points, and air-miles bonuses on rewards cards, and low-rate balance transfers.

But getting new cards and closing old accounts might affect your credit score. Here we answer some common questions and dispel myths about credit scores:

How many cards are too many?

Contrary to popular belief, having a lot of credit cards is not detrimental to your score. That's because one component of the scoring formula is the ratio of balances to credit-limit utilization. The more available credit you have relative to the amount you charge each month, the higher your score is likely to be.

"If you go on vacation one month or have a lot of unexpected expenses, your utilization won't spike as much as if you had only one or two cards, so you've insulated yourself from radical plunges of your credit scores," says John Ulzheimer, president of consumer education at SmartCredit.com, a credit-monitoring company. Ulzheimer previously worked at Fair Isaac, inventors of the FICO credit score. If you have credit cards with extremely high borrowing limits, say $25,000 or so, you need fewer cards to maintain an attractive balance-to-credit-limit ratio.

Of course, you need to keep your spending well below your limits. If you max out your cards, your score will take a hit. FICO measured the impact in an analysis of two borrowers, one with a score of 780, the other with 680. (FICO scores range from 300 to 850.) After maxing out one credit card, the first person's score dropped to between 735 and 755, and the second's fell to between 650 and 670. Higher scores often experience larger drops when cards are maxed out, in part because lower scores already reflect riskier past behavior.

Should I apply for several cards?

Your score can be affected by any new credit issued and the number of recent inquiries on your report resulting from your applications for new credit. FICO usually excludes inquiries that show you're rate shopping for college loans, auto loans, or mortgages, but not credit cards. Every credit card you apply for will be considered a hard inquiry on your credit record; inquiries remain there for 24 months and could affect your score for the first 12.

If you have a lengthy credit history, such inquiries shouldn't affect your score much, if at all. But if your credit history includes only one other account and you open a new one, the length of your average credit history will be halved and your score will probably drop.

Compare rates and offers at credit-card comparison sites such as CardRatings.com or LowCards.com. Then apply for just one at a time.

Should I keep my oldest card?

It's a common belief that you should never close the card you've held the longest. (The length of your credit history makes up 15 percent of your score.) But credit bureaus usually leave closed accounts on your file for 10 years, so your long-held cards will still be factored into your score after you ditch them. If you've obtained other credit accounts over the years, closing one card shouldn't have a big impact unless it represents a significant portion of your available credit. In that case, closing your old card could hike your balance-to-credit ratio and lower your score.

When should I ditch a card?

If the interest rate on your card is higher than 15 percent, about the average rate for credit-card offers, consider switching to a new card. If you're carrying a lot of high-interest credit-card debt, consider taking advantage of a 0 percent introductory balance-transfer offer, and pay off the balance before the rate goes up after the introductory period. You'll probably have to pay a fee of about 3 to 4 percent of the amount you transfer. To qualify for the best balance-transfer offers you'll need a credit score in the mid-700s.