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When it comes to applying for credit cards, everyone’s biggest concern is the hit to their credit score.
Is it going to drop? How much will it drop? Are there any other negative consequences?
First you need to worry about soft vs hard credit checks, the fact your average account age decreases, and your total available credit changes too. There’s a lot going on, especially if you’re planning on cancelling an old card as well.
So, let’s look into the factors that go into your credit score. You’ll see that if your credit score is already strong, there’s really not much to worry about.
And since I recently applied for a new credit card, and cancelled an old one, we’ll show you a real world example of how a credit score actually changes.
- Hard vs soft credit checks
- How credit score is calculated
- A real example of how a credit score changes
- Top credit cards to apply for
Hard vs soft credit checks
If you’re applying for new credit, you’ll likely be subjected to credit checks.
There are 2 kinds of credit checks – often referred to as hard and soft – and we’ll give an overview of them here. There are 2 credit report bureaus in Canada that are used for credit checks – Transunion and Equifax.
One thing to note about credit checks – banks only check one bureau when they do credit inquiries. So your score will only be impacted on one of your files, but not both.
Soft credit checks
Soft credit checks have no impact on your credit score.
Soft checks are done for a few non-lending reasons. If you’re curious about your own score and check it out, it’s considered a soft check. Once you’ve established a relationship with a bank or credit card issuer, they sometimes can take a peek and see your file (say, for a promotional credit card offer), and these are also soft checks.
There’s no impact on your score when a soft check is done, and no one can see them except you and the person who requested it.
Hard credit checks
If you’re applying for new credit, you’re most likely going to be subjected to a hard credit check.
These credit checks are reported on your file, and anyone who makes an inquiry in the future can see who has made a check on your file. These checks also stay on your file for upwards of 3 years.
These checks do result in a small dip in your credit score.
One point to note: if you have an existing relationship with a bank, they may not do a hard credit check at all. They could either just use your history or conduct a soft check instead, but there’s no guarantee on this.
How a credit score is calculated
Besides credit checks, what else goes into calculating your credit score?
This page from Equifax has the full details, but here are the highlights.
There are 5 key things that influence your credit score:
- payment history (about 35% of your score),
- used vs. available credit, also called the utilization ratio (30%),
- the length of your credit history (15%),
- public records on your account (10%), and
- the number of inquiries into your credit file (10%).
Payment history is the largest at 35% of your score, whereas inquiries are only 10%.
Applying for a new credit card affects 3 of these items. You’re (potentially) adding a new hard check, increasing the amount of credit you have available, and decreasing the length of your credit history.
If you cancel an older credit card at the same time, you’re also decreasing the credit available to you, plus decreasing the length of your credit history.
One thing to note – how they calculate each section isn’t publicly available, as an algorithm determines the actual score for each factor.
A real example of how it changes
So that’s all great. But, how does your score actually change?
Well, I recently made a change to my wallet. My new Scotiabank Ultimate Package chequing account gives me an annual fee waiver for 1 of 4 Scotia credit cards.
Here are the details on what I changed:
- I applied for a
with a credit limit of $5,000, and
- closed a 3-year-old
account with a credit limit of $24,000.
One great feature of the account is it has free credit score monitoring from Transunion. We’ll use it to determine my score before and after I make the credit card switch.
It also has a credit score predictor, so we’ll see what it thought would happen beforehand as well.
Based on the fact that I’m losing $19,000 in available credit, shortening my credit history, and adding a hard credit inquiry – I predict there will be a decrease in my score of some kind.
How my score looked before and what the predictor thinks will happen
So, how does my score look before any changes take place? Here it is:
817 – pretty sweet. Self high-five!
Now, what about the credit score predictor? You can change all kinds of things, including adding a new card, closing your oldest account, and paying off balances.
We’ll add a new credit card with a $5,000 limit, add a new credit inquiry, and close my oldest account.
Here’s what it’s predicting:
It predicts an increase of 7 points. Interesting.
It actually won’t be accurate – I’m not closing my oldest credit card account on my file. But it’s still interesting that it foresees a scenario where my score could potentially increase by replacing a credit card.
What actually happened
So what actually happened? Here is the final result:
Our original prediction – a decrease in my score (and yes, the hard credit check was done with Transunion).
But it’s only 16 points. Nothing earth shattering.
In fact, I would’ve expected it to be more, just based on how much available credit I lost which raised my credit utilization ratio.
Now, this is just one example. Like we’ve seen earlier, it all depends on how many credit cards you carry, what your balances are, and your payment history. There are a lot of factors and numbers to crunch to get this score.
But in this case the actual result was quite small, and Transunion even saw a scenario where my score actually increased.
Top credit cards to apply for
So if you’re thinking on taking the plunge on a new credit card with this new information in hand, here are some of our top overall rated credit cards.
And for spotlights on great deals right now, you can check out our monthly hot deals post – which is updated every month with great credit card offers.
|Credit Card||Current Offer||Earn Rates||Annual Fee, Income Requirements||Apply Now|
|American Express Cobalt||Up to 30,000 points (terms)||* 5 points per $1 spent on groceries and restaurants
* 2 points per $1 spent on gas, transit, and travel
* 1 point per $1 spent on all other purchases
|* $120, charged out as $10 per month
* No income requirements
|Scotiabank Momentum Visa Infinite||None||* 4% cash back on groceries and recurring bills
* 2% cash back on gas and transit
* 1% cash back on all other purchases
|* $120, first year free
* 60K personal or 100K household
|TD Aeroplan Visa Infinite||15,000 Aeroplan miles (terms)||* 1.5 miles per $1 spent on eligible gas, groceries, drugstores, and aircanada.com
* 1 mile per $1 spent on all other purchases
|* $120, annual fee rebate in the first year
* 60K personal or 100K household
|BMO AIR MILES World Elite Mastercard||2,000 AIR MILES (terms)||* 1 mile per $10 spent||* $120, first year free
* 80K personal or 150K household
|Tangerine Money-Back Mastercard||None (terms)||* 2% cash back on up to 3 categories of your choice
* 0.5% cash back all other purchases
|* No annual fee
* 12K personal
Our #1 rated credit card, the
You’ll earn up to 5 points per $1 spent on your purchases. And in the first year, you’ll earn 2,500 bonus points every month you spend $500 in the first year – that’s up to 30,000 points right in your pocket.
And with an Amex Membership Rewards point worth up to 1.75 cents each when redeemed for flights, the card provides a return as high as 8.75% on your spending.
High earn rates and top notch point values are a big reason why it’s our top rated card.
The card applied for in our example – the
As our top rated cash back card, it offers plenty of cash back on your everyday purchases – up to 4% back, in fact. It’s also currently first year free.
Want to collect Aeroplan miles? Our top Aeroplan-branded card is the
You’ll earn up to 1.5 miles per $1 spent on your purchases, and get a welcome bonus of 15,000 after your first purchase.
And when you redeem your miles for flights on Air Canada, you’ll get some great perks, like your first checked bag free and priority check-in. Plus the annual fee is rebated for the first year as well.
Psst. If you can live without the Air Canada perks and would prefer to earn more miles on your purchases instead, then look at the
This card will let you earn 2 points per $1 spent. And though it doesn’t earn Aeroplan miles directly, you can transfer your Amex Membership rewards to Aeroplan at a 1:1 ratio. And if Aeroplan doesn’t suit you, you can fall back on a host of other travel redemption options as well.
You’ll earn 1 mile for every $10 spent on the card. And you can earn 2,000 bonus miles when you spend $3,000 in the first 3 months.
It also has top notch insurance (14 out of
For a top no fee cash back card, that pairs well with just about anything, take a look at the
You’ll earn 2% cash back on up to 3 categories of your choice, while earning 0.5% back on everything else.
And for a few more perks, you could opt for the
Credit checks and how they’ll affect your credit score can be scary, especially if you’re thinking of applying for a mortgage or loan in the near future and want to make sure your credit score is in tip top shape.
But if you already have a strong score (think 760 or higher), there’s nothing to worry about.
And remember, it’s just a number and it goes up and down all the time. Many places will have their own way of coming up with your score, and just making sure you’re up-to-date on payments and not constantly getting new credit cards will be more than enough for to cover yourself.
What are your thoughts on this subject?
Let us know in the comments below.