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Higher limit or second card will impact your credit score

By Karen Price Mueller

Opening Credits
Columnist Karin Price Mueller
Karin Price Mueller is an award-winning writer with a specialty in personal finance.

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'Opening Credits' stories

Question for the CreditCards.com expert

Dear Opening Credits,
I currently have a Capital One card (my first one) with a $500 limit. I opened it in late July or early August. I have been thinking of getting another one that gives me a higher limit, but I am concerned with my credit score. On the other hand, $500 is too little, I think, especially when it comes to going on a trip and such. Would it be a good idea to get another one? And if so, should I keep my Capital One card or close it? -- ZJ

Answer for the CreditCards.com expert

Dear ZJ,
Kudos to you for thinking of your credit score before making a move.

We have to make some assumptions about your situation. We'll assume you're diligent about making timely payments on your current card and that you have no negative credit history from other transactions, such as car loans or college loans that haven't been honored.

Now, the background on credit scoring: It generally takes at least six months before there's enough of a history about you on file with the major credit bureaus to translate onto your credit score. For details on how this works, I talked to Craig Watts of Fair Isaac Corp., the company that created the FICO credit score.

Watts says the FICO scoring formula requires that the person's credit bureau file include at least one credit account that is at least six months old, and at least one credit account whose information has been updated by the creditor at least once within the previous six months. 

So, in your case, lenders won't be able to obtain your FICO score until at least February, six full months after you opened your first account. Thus, if you apply for a new credit card today, you won't have much of a credit history, if any, to boast about.

Join the 700-plus credit score club
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Having a solid credit history with a credit score over 700 will open doors to money-saving opportunities -- from low-interest mortgages and loans to lower APR credit cards, better insurance rates and even jobs. Here are a slew of tips that can help get you and keep you in the get and keep a great credit score.

Now, your question: Yes, opening a second account this quickly will almost certainly lower your FICO score, but probably not by much. And it's not just you: Everyone who opens a new account is technically taking on more credit risk, so just about everyone's credit scores will see a slight drop.

"Over time, their FICO scores will slowly recover in response to their responsible credit management -- that is, always paying bills on time, keeping credit card balances low relative to credit limits and taking on new credit only when it is really needed," Watts says.

He adds that you should remember that your credit score is only part of your financial picture. If you plan to get this one additional credit card and then not open any more credit accounts for a while, you'll have plenty of time for your score to rise as you make responsible payments.

Another option might be to ask your current card issuer to raise your credit limit. Some issuers are trimming the credit limits of even those customers with good credit in hopes of lessening their own risk levels in these tough economic times. However, if you're in good standing, they may agree to do it. (Over your credit life, you'll see it's not uncommon for lenders on occasion to raise your credit limits on their own, without a request from you.)

Requesting an increase will count as an inquiry, just as applying for a new card would, but having just one card instead of two might be easier for you to manage. Plus, getting a second card will lower the average age of your credit accounts, which could also count against you for your credit score.

Your second question: Should you keep the first card? A resounding yes! Keep it. Here's why:

  • Your utilization ratio: This ratio indicates how much credit you have available compared to how much you're actually using. The lower the number, the better. The ratio includes all your credit accounts, so closing an account will make your ratio go higher because you'd have less available credit compared to the outstanding balances.
  • Credit history: You're new to the credit game, and you don't have a very long credit history. Closing the account you opened in the summer would be like hitting the "restart" button, and your credit history would have a new start date.

Finally, whenever you decide to look for a new card, make sure to get one that doesn't charge an annual fee. If you're holding on to the new card for vacations or future large expenses, you don't need the extra cost, especially if you're not regularly using the card or receiving rewards or benefits from the card.

See related: Closing credit card accounts, Glossary of common credit card terms

Karin's money makeover column "Get With The Plan" can be seen every Sunday in "The Star-Ledger" and "The Trenton Times." She also hosts and writes "Money 911," a multimedia series for MSN Money. Before writing became her main focus, Mueller was the executive producer of CNBC's The Money Club, where she led the team that won the network's first ever Cable ACE Award for Business and Consumer Programming. Mueller lives in New Jersey with her husband, three kids, one guinea pig and one leopard gecko. Whatever they don't eat goes into her retirement savings accounts. A comprehensive archive of her writings is available on her Web site, www.KarinPriceMueller.com.

Send your question to Karin.

Published: November 19, 2008



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