1. Only Apply for a Credit Card When It Is Need-Based
Many people choose to apply for and open new credit cards because of an attractive logo or because they are hosted by your Alma Mater, but those are not good reasons. Each application, called an inquiry, is listed on your credit report. When several inquiries are made in a short span of time, this action is noted by many credit agencies as a red flag of potential financial difficulties. Basically, credit card companies see that you are applying for several lines of credit in very quick succession, possibly indicating that you do not have the funds to pay your bills and that you need the credit to continue to survive. This could lower your credit score. In order to avoid such a red flag, you should only apply for new credit cards at necessary moments, such as when you know that you have increasing expenses or when you are looking for lower interest rates in order to reduce your monthly payments. Avoid the temptation to open an account because it offers some sort of side perk or because you desire the rewards package. Opening a card and not utilizing it is also damaging to your credit score. Select credit cards that will improve your overall financial situation at the moment.
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2. Contact Existing Credit Card Companies to Increase Limits
Rather than applying for a brand-new line of credit, another option is to contact the companies of your existing credit cards and to inquire about raising your current credit limits. In this scenario, if your credit company agrees to an increased spending limit, you have more credit without beginning a new account. Some companies may add an inquiry to your credit report when your limit is increased, but this inquiry will not damage your score because you are simply adding to your existing account. You are already working with a company that knows you, your spending habits and your payment history. In addition, since you are not opening a new credit account, you are not affecting the average age of your credit accounts or your overall number of lines of credit, two other factors that weigh heavily in your credit score.
3. Plan Home and Auto Loan Inquiries
Applying for a home or auto loan is generally a much larger investment than applying for a credit card. You want to make sure that you can get the best rate possible on these loans, and shopping around for the best deal will not affect your credit score as long as you keep your inquiries within a 30-day window. Looking for the best rate means that multiple lenders will request your credit score, a process that would typically affect your credit. However, if you plan ahead of time which lenders will have access to your account and keep their inquiries and your loan application within that 30-day window, your credit score will list a single inquiry and will not be affected.
4. Use a Credit Card Company That Offers Soft Checks
More and more credit card companies are offering potential cardholders “soft checks” of credit rather than the more traditional hard checks. Soft checks are visible to you as a listed inquiry on your credit report, but they do not have any bearing on your overall score. In addition, most potential lenders will not even see these soft checks when requesting your credit report for loan applications. In theory, you can request as many soft checks as you would like, although there are potential repercussions for an inordinate number of checks. Once you have located a credit company that allows soft checks and pre-qualification, you can use the pre-application process to determine whether you will be approved or denied, as well as your probably credit rate before you even complete the process. This opportunity to see your final credit results without actually going through the entire hard-check application process, can help you avoid a situation in which you are denied and your credit score is damaged.
5. Do Not Apply for a New Credit Card Within Six Months of a Major Loan
Beginning a home or auto loan is typically seen as the good kind of debt that actually improves your overall credit score. However, applying for a new credit card six months before or six months after such a major loan is often damaging to your credit score. Many lenders that see your credit card application on your credit report in such a short time span before a home or auto loan will be wary of your financial situation if you needed a credit card just before a major purchase. Similarly, opening a new credit card quickly after a large loan can indicate that you are not handling the new payment, thus negatively affecting your credit score. Plan ahead, and make sure that you keep your credit card applications well-spaced from new, large loans.
6. Consider a Personal Loan From a Marketplace Lender
Unlike traditional banks and credit card companies, marketplace lenders are quickly becoming one of the most popular methods for opening a new personal line of credit. While most people use marketplace lenders to pay off high interest credit cards to reduce overall debt, these credit companies can be used for a wide variety of credit applications. Marketplace lenders typically employ soft checks to determine your pre-qualification status before you complete the application process, thereby protecting your credit score. In addition, these lenders will often indicate how much money you are entitled to borrow, as well as the set interest rate and the fees associated with your loan. You can even compare the packages offered by several marketplace lenders before you make your final selection. Once you have chosen a marketplace lender, that company will add a hard check to your credit report, but you already know your pre-qualification status, loan amount and rates before this occurs.