One of the most common questions that readers want to know is how a credit inquiry affects your credit score.
A juicy bonus points offer might tempt you to apply for a new credit card, but what should you do with your old one? Then there are travel hackers who open and close multiple credit card accounts within a short period of time in order to maximize their rewards points and minimize fees. Will that have a negative effect on your credit rating?
To answer these burning questions, I reached out to Paul Le Fevre, Director of Operations at Equifax Canada, one of the major credit reporting agencies in the country.
1. What happens to my credit score when I apply for a new account?
Equifax response: Scoring products include inquiries as a component of the score. Approximately 7-10% of a score is based on the entire inquiry section, typically looking at ALL inquiries present within either a 1-3 year period, depending on the scoring product and product version.
The score also considers the inquiry type (mortgage/car loan, retail card inquiry etc). Mortgage and auto loan inquiries are each considered collectively to count as a single inquiry over a specific period of time so a consumer is not heavily impacted by shopping around for the best mortgage deal or auto loan.
2. What about when you apply for multiple credit cards within a short time frame?
Equifax response: The biggest misconception in the marketplace is that a single inquiry has a significant impact on a score: that is simply not true. In fact, 90-93% of a score is derived from how a consumer has managed credit over time and is currently managing their existing credit product portfolio.
If a consumer applies for multiple products in a short period of time, the impact may be slightly higher. However, I stress that payment patterns (when a consumer pays their bills) and outstanding balances (% utilization of the credit limit) weigh much more heavily on the score than inquiries.
3. Is it better for your credit score to keep your old credit card account open and inactive, or to cancel it altogether when you open a new account?
Equifax response: The best advice is to get the credit that you need and use it wisely.
Depending on the scoring product, an inactive account will not factor into the score after certain periods of inactivity, but may still impact debt service equations. Each file is different, but the consumer should be accessing and using credit products based on actual need. A long-standing credit product in use by the consumer (and in good standing) over a significant period of time will have a positive impact on a score.
4. What should “points hackers” (consumers who open and close multiple credit cards in order to take advantage of bonus points and rewards) be aware of when it comes to their credit rating and credit score?
Equifax response: Consumers who open/close multiple products on a regular basis will see a higher impact at the inquiry component of a score (due to regular and ongoing new inquiry traffic) and may also be impacting debt service equations overall.
Scores look at longevity of product use: the longer the product is in use, the more positive the score impact. Lenders look at all existing open products as part of their risk assessment, which could actually impact a consumer’s ability to obtain the credit that they truly need as opposed to obtaining credit for the sole purpose of obtaining rewards/points.
One of my Twitter followers liked a recent article on cash back credit card rankings and said he’d love to switch to the Scotia Momentum Visa Infinite but he didn’t think it was a good idea because he’d be applying for a mortgage in a few months. He was worried about the impact that opening a new credit card account would have on his credit score.
Countless threads on the Personal Finance Canada subreddit obsess over credit scores, credit utilization, and the impact of having multiple credit card accounts and access to higher spending limits.
But now you’ve heard it right from Equifax – applying for credit cards, even opening multiple accounts within a short period of time, has minimal impact on your credit score if you manage your credit responsibly.