The holiday seasons are quickly approaching and many of us will begin shopping for gifts. Almost every store will be offering a discount on your purchase if you sign up for their retail credit card. I know this 10%-25% savings on your purchase seems great! Before doing this though, please think of the effect it will have on your credit.
•1. First, you are giving the store permission to pull your credit which leads to an inquiry showing up on your credit reports. We all know by now that inquiries, especially credit card inquiries, can have a negative affect on your credit. Now imagine going to several stores and doing this and having these new inquiries stay on your credit reports for the next 12 months... Remember that "New Credit" accounts for 10% of your score in the FICO scoring model.
•2. Second, each of these new accounts will show up on your credit reports. The key word here is new. This will lower the overall average age of the other accounts that are on your reports. This accounts for 15% of your score.
•3. Third, is the fact that you are opening revolving accounts. That means any balance you owe on the account is increasing your debt utilization, which calculates 30% of your score. The higher the utilization, the lower your score.
•4. Fourth, when given these retail cards, you are usually offered no payments for a certain period of time. This will result in a stagnant account with no balance reduction. This means you will not be making payments and building payment history, which accounts for 35% of your FICO score.
Be careful that the store is not signing you up with a third party finance company. The fact that you have a finance company account on your credit reports can lower your scores regardless of how well you make your payments. Don't confuse finance company accounts with credit cards like VISA or MASTERCARD!
My suggestion would be to forgo the in-store credit card offers and pay the full amount for your purchase. Saving 10% or 15% now can cost you in the long run.
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