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Does applying for a credit card affect credit rating?

Does applying for a credit card affect credit rating?

A credit rating is a number that reflects your creditworthiness. It’s one of the first things that lenders check when you apply for any kind of credit. If you have a high credit score, it implies you pose a lower credit risk and have a better chance of getting your loan or other credit product approved. 

The way your credit score is calculated can differ depending on the credit bureau. However, some of the indicators prevalent across most credit reporting agencies are:

The total amount of credit you currently have, this means all the remaining balances of any loans you have and the credit limits of any credit cards.
Your repayment history across both financial products and your utilities or bills.
The number of credit applications you've made, which usually only stay on your file for a specific period.

This means every time you apply for a credit product such as a credit card, it will show on your credit report. But does it mean that opening a credit card hurts your credit? Will your credit score drop if you apply for multiple credit cards?

Does applying for a credit card hurt my credit score?

For starters, just one application for a credit card is unlikely to hurt your score. If this is your first time applying, or you are a single-card holder looking for a better deal, this won't be a big issue. However, if you have multiple applications within a short period, your credit score might take a hit. 

This is because every time you enquire about a credit product, it is recorded on your report. If you have multiple hard queries or queries that appear on your report, lenders might perceive you as more irresponsible with finances. Moreover, several applications might indicate that you can’t keep up with your expenses and urgently need more money. These signs can indicate to lenders that you’re a high-risk borrower and make them wary of giving you credit.

How many credit cards can I have?

It’s not about having a certain number of credit cards; you can have multiple credit cards and have the best credit score. It’s about the pattern. If lenders see multiple applications within a specific period, that will flag as a potential risk.

Alternatively, if you have missed multiple payments for your single credit card, this will reflect negatively on your credit score. So, having more than one credit card open isn't necessarily good or bad. 

The other impact it can have on your score depends on the combined credit limit. For example, let's consider you have two credit cards, one of which you use to pay off a balance transfer and another to earn points on purchases. If you don’t have a high combined credit limit, and you make timely repayments, this is very likely to help your credit score. But if you have two credit cards with high credit limits and fail to make repayments, this will hurt your credit score.

How to maintain your credit score and increase your chances of getting approved

Are you wondering how you can keep your credit score in good shape and still increase your chances of getting approved for your credit card application? You can start with:

  •  Paying all your credit payments on time

Your payment history impacts your credit score. Make sure you don't miss any monthly payments, whether it’s on a credit card or a loan, by setting up direct debits or reminders in your ohone. This will also help avoid interest costs and late payment fees.

  •  Keeping track of your expenses and spending

Your credit report doesn’t go into any detail about your spending or transactions. However, if you’ve maxed out your credit card, it will appear on your report, and it can prove to be a problem. This is because any increase in the current balance on the card will increase your repayment burden, making you more likely to default.

  •  Monitoring your credit report

Any positive moves you make to maintain a good credit score like timely repayments and low credit balance might not be of much help if there's an error in your credit report. Mistakes can happen to anyone at any time. Hence, thoroughly checking your report at regular intervals can help detect errors sooner so you can correct them and maintain a good credit score. You can access a free copy of your credit report from one of the three credit reporting agencies in Australia once a year. You can also check your credit score here.

Questions you may have

How easy is it to get a credit card?

For most Australians, there are no great barriers to applying for and getting approved for a credit card. Here are some points that a lender will consider when assessing your credit card application.

Credit score: A bad credit score is not the be all and end all of your application, but it may stop you being approved for a higher credit limit. If your credit score is less than perfect, apply for the credit limit that you need, rather than the one you want.

Annual income: Most credit cards have minimum annual income requirements. Make sure you’re applying for a card where you meet the minimum.

Age & residency: You need to be at least 18 years old to apply for a credit card in Australia, and most require that you are an Australian citizen or permanent resident. However, there are some credit cards available to temporary residents.

Do you need a credit card to get a loan?

You do not need a credit card to get a loan, but you usually need to have a credit history. Without a credit history, a financial institution cannot assess your ‘credit worthiness’, or your capacity to pay off the loan.

If you don’t have a credit card, your credit history can reflect any record of paying off an asset. Without any credit credit history, you’re limited in the type of loans you can apply for. But you may be able to obtain a secured loan against an asset. For more information on improving your credit score, go here

How do you receive money through PayPal?

Here’s how to receive payment via PayPal:

  1. Open a PayPal account and confirm your email address
  2. Share your mobile number and email address with the sender
  3. Once the payment is received, PayPal sends an email confirming credit to your account

Any money in your PayPal account can be transferred to your bank account or used for online shopping or can be transferred to family or friends.

How to get a new credit card

To get a new credit card, generally you need to be at least 18 years old and have a good credit rating. You don’t need to be an Australian citizen. Usually you can apply online or in person at a branch of the card issuer. You’ll typically have to supply information like:

  • Your income and living costs (e.g. rent/mortgage, loan repayments, living expenses)
  • Your employer’s contact details
  • Details of your assets and any debts you are paying off

What should you do if your credit card is compromised?

Credit card fraud is a serious problem. If your credit card is compromised and you’re wondering what to do, here are a few precautionary steps to take.

Contact you credit provider – Get in touch will your credit card provider. If you feel your card has been compromised, you should be able to lock or block it.

Monitor your accounts – Keep an eye on your credit card accounts. Any unauthorised transactions could be a sign your credit card has been compromised.

Check your credit rating – It’s also important to check your credit rating, to ensure you’re not a victim of identity theft or some other financial mischief.

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This article was reviewed by Personal Finance Editor Alex Ritchie before it was published as part of RateCity's Fact Check process.

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