Store Cards Can be Bad News for Credit Scores
By Eva Norlyk Smith Ph.D.
April 2, 2012
I've heard that I should be careful about opening up store credit accounts. But I'm about to make some big purchases in the near future – new furniture, a new computer and a bunch of home renovation/decor stuff. So that nice 10 percent discount you get for opening a store card could be pretty handy! I have two credit cards now (one I've had for five years, one I've had for 10), and I'm carrying a zero balance on both of them. My credit score is in the low 700s. Would it hurt my credit if I open a couple store cards in the next month or so – and then immediately close them? I'm thinking I'll be getting one from the store where I get the computer and the other from the place where I get all the home stuff. – Hannah
We've all been in your shoes: Saving that extra 10 percent on big purchases is extremely tempting! And indeed it does seem to make perfect sense, if part of a pre-planned purchase strategy. Unfortunately, there are many ways that applying for store credit cards can come back to bite you.
As you suspect, applying for score credit cards can indeed hurt your credit scores. Here are some factors to consider:
- Multiple credit inquiries hurt credit scores. Applying for several store credit cards within a month will lower your credit scores. It doesn't really matter if you close the cards right away (in fact, you're better off not closing them). The credit inquiries will remain on your credit report whether or not you keep the store credit cards open.Credit inquiries can lower scores by 8 to 30 points; people who apply for several cards within a short period of time will see even bigger drops. On the bright side, the effect of credit inquiries is short-lived, and your credit score will likely recover within a 12-month period. However, the inquiry may stay on your credit report for up to two years.
- Having multiple store credit cards may ding scores. Opening one store credit card is less likely to hurt you than opening several. People with many store credit cards may be considered riskier borrowers, and credit scoring models take that into account. Even if you close the store credit cards, the credit accounts remain part of your credit history for seven years.
- Length of credit history affects scores, too. The length of your credit history accounts for 15 percent of your FICO score. Accounts with a long history are more beneficial to your score than those you just opened. So, each time you add a new credit account to your mix of credit cards, it can cause your score to drop.
From what you're written, it sounds like you plan on paying the store credit cards off right away. This is a definite plus, as carrying high credit card balances in relation to the credit limit would also lower scores. Keep in mind that retail credit cards come with higher annual percentage rates (APRs), so carrying over a balance on one of these cards can be very expensive.
How much of a concern is the effect on your credit score? It depends. If you're planning to take out a mortgage loan or a car loan within the next year or two, even a 30-point drop could cost you dearly. With your credit score already in the low 700s, you don't have much room for error. To qualify for the best interest rates and terms on mortgages and car loans, your FICO score should be above 720, preferably in the 740 to 750 range. Even paying 1 percent more in interest on a mortgage loan can cost tens of thousands of dollars over the life of the loan; the bigger the loan, the higher the loss.
Now, there are some plusses as well. Managing a variety of credit accounts is considered positive, and, as the store card account ages, it could help increase your score by a few points.
Still, it's important to weigh the pros and cons. Yes, you may save a little money, but is the impact on your credit worth it? While your credit will likely eventually recover, if you don't use the store credit cards, is it worth the uncertainty? And, even more basically, since most store credit cards come with a low credit limit, will you even get a sufficient credit limit to charge the full amount of the purchases and get the full 10 percent discount?
This is not to say that store credit cards with 10 percent discounts never have their place as part of a carefully thought-out purchase strategy. But the risks often outweigh the rewards. If you're eyeing discounts, you might be better off taking a look at some of the credit cards with bonus sign-up offers worth $200 or more, which also feature cash-back rewards that you will continue to benefit from.
Adding one or two credit cards with sign-up bonuses to your portfolio might well give you similar savings. More importantly, if the cards are managed well, it will have a positive long-term effect on your credit score. It takes years of planning and excellent credit management to achieve top credit scores. In a society where credit scores reign supreme, gambling with your credit score for a few hundred dollars in savings is rarely worth it.