Opening Store Credit Cards May Lower Your Credit Score
Thinking about buying lots of gifts at one store? If so, you'll probably be tempted by the cashier's offer to open a credit card account with that store for a significant savings on your current purchase. But before you sign on the dotted line, understand how that could affect your credit score.
One of the items factored into the calculation of your credit score is your number of new credit inquiries. This includes applications for home mortgages, car loans and credit cards. Basically, every new line of credit you apply for causes your credit score to drop a few points.
Done once in a while, this drop is insignificant-;out of a possible 850, three or four points likely won't alter your overall credit rating. But, when the rush of holiday shopping comes around and you stand to save serious dollar amounts by opening card after card, those points can add up.
If you go to a shopping center and apply for credit cards at seven stores, saving 10% each time, you may have smaller bills to pay. But for that one-time savings, your credit score could go down almost 30 points, a significant move.
What Does My Credit Score Affect?
Your credit score, in turn, can impact various areas of your life, including what rates you can get on home and car loans.
Consider this: According to a rate calculator on myFICO.com, if you have an "excellent" credit score (760-850), your monthly payments on a 30-year fixed-rate $150,000 loan would be around $883. If your score is between 660 and 699, though, payments jump to $932 per month.
And, as your credit score decreases, your monthly payments will continue to rise.
So, if you apply for ten new credit cards while doing your holiday shopping, your credit score would drop about 40 points. Even if you never plan to use those cards again, your credit score will drop.
For example, if you had a "good" credit rating of 720 at the beginning of the holiday season, you would be down to only a "fair" rating of 680.
Any loans you sought after the holidays would be significantly more expensive than before. And if you end up having trouble paying off the bills on all those new cards, your score could drop even further.
Other "Credit Inquiries"
The calculation of your credit score includes a consideration of how many recent credit inquiries you've had, but some of those inquiries do not harm your score, if conducted properly.
If you're shopping around for a home or car loan, for example, each lender checks your credit report, which shows up as a "credit inquiry." As long as you do your "loan shopping" during a limited period of time (most sources recommend 14-30 days for each type of loan inquiry), your score shouldn't be affected.
In fact, actively seeking the best deal can ultimately benefit you in the long run, as lower rates and monthly payments translate to a higher likelihood that you'll keep up with your bills.
If you're interested in learning more about your credit score or how credit scores are calculated, consider consulting a bankruptcy lawyer or visiting AnnualCreditReport.com for details.