This Move Results in a Lower Credit Score -- and I Have No Qualms About Making It

My credit score used to be a perfect 850. And while that's something I used to take pride in, it's also something I'm not willing to chase.

It's really hard to maintain perfect credit, because sometimes, a completely innocent and financially sound move will cause your credit score to take a small hit. And as long as you're able to keep your credit score in good shape, you shouldn't have too much trouble getting approved for a personal loan or credit card when you want one.

In fact, a big reason I no longer have perfect credit is that I've applied for a number of credit cards in recent years. And each time that's happened, my score has taken a modest hit. But that's not something that worries me in the slightest. And if you have good credit, it shouldn't worry you, either.

An unavoidable dip

When you apply for a credit card, the issuing company performs a hard inquiry on your credit report. Credit card companies need to make sure they're issuing credit to borrowers who have a history of paying back their debts. And that's understandable.

Meanwhile, a hard inquiry on your credit report will generally result in about a five-point drop in your credit score. Too many credit card applications in short order could raise a red flag on your credit report, since it might seem like you're suddenly desperate to borrow money. But if you apply for a new credit card once every six months, or more like once a year like I do, then that shouldn't reflect poorly on you from a borrowing standpoint. And you shouldn't necessarily let yourself get stressed if your credit score drops by five points or so as a result.

In recent years, my credit score has hovered between an 810 and an 830. That puts me in a very strong position to borrow. So I don't have to sweat it if a credit card application drags down my score by a handful of points.

Even if your credit score isn't as high, if it's decent, then a five-point drop generally won't impact you. If you're applying for a mortgage, for example, you're unlikely to see a substantial difference in the rate you're offered if your credit score is a 720 versus 725. And your chances of getting approved in the first place aren't very different between a 720 and 725, either.

Ways to avoid a major credit score hit

It's perfectly reasonable to apply for a credit card from time to time. And you shouldn't let the idea of a five-point credit score drop stop you from doing that if it otherwise makes sense.

That said, you should take steps to avoid a major drop in your credit score. Being 30 days late or more on a bill or debt could cause your credit score to plunge, so make a point to pay all bills on time.

Racking up a large amount of credit card debt relative to your total credit limit could also cause similar damage, so aim to keep your credit utilization to 30% of your credit limit or less. This means that if your total spending limit across your credit cards is $10,000, you'll want to make sure to not let your outstanding balance exceed $3,000.

But otherwise, don't sweat a modest credit score drop. It's just one of those things that happens when you apply for a new credit card. And the financial benefits of doing so, like snagging a generous welcome bonus, can more than make up for that minor hit.