If saving money is a priority, it probably piques your interest when a department store clerk offers you the opportunity to save 10 percent or more on your current purchase. You'll probably have to fill out an application for one of the store's credit cards to get the savings. While the extra discount can be tempting, think twice before you fill out a new credit card application. That department store card could come back to haunt you in the form of a lower credit score.
Just because you apply for a credit card with that store, there is no guarantee the store will accept the application. Before it can determine your creditworthiness, the store must pull your credit. That means credit issuers will perform a "hard inquiry" that will shave several points from your credit score. Credit scores range from 300 to 850, and you should strive to maintain a credit score of 700 or above. While a single hard inquiry typically costs you no more than five points, several hard inquiries within a short period of time could spell trouble for your credit rating.
Temptation to Spend
Paying with plastic can cloud your judgment of just how much you're spending. A 2010 "Psychology Today" article claimed consumers paid less attention to prices and paid more when they used credit cards. That trap can lead to high debts, which will have serious consequences for your credit. The amount of debt you carry has a significant impact on your credit rating. In addition, department store cards tend to carry higher interest rates than traditional credit cards. The temptation to spend coupled with high interest rates is the perfect recipe for debt.
A reasonable balance of different types of accounts can help keep your credit score stable. The two major types of accounts your credit report reflects are loans and credit cards, but the types of credit cards you carry also makes a difference. In an 2008 interview with Bankrate.com, FICO product support manager Barry Paperno explained that carrying too many department store cards in relation to traditional credit products can have an adverse effect on your credit scores. Unfortunately, the FICO scoring formula is a trade secret, and there is no real way to estimate how much damage you could incur with too many department store cards. However, a good rule of thumb to follow is to have no more than two department store cards for every traditional credit card you carry.
Ultimately, there is little difference between department store cards and traditional credit cards. Like any credit card, the biggest danger to your credit rating arises when you skip payments or default on the debt altogether. Your payment history is the most prevalent factor for determining your credit scores. According to MSN Money, a single late payment can set you back anywhere from 60 to 110 points Carefully monitor the bills and payments on all of your credit accounts to ensure you never fall behind.
- MyFICO.com: What Are Inquiries and How Do They Affect My FICO Score?
- Psychology Today: Spending and Credit Cards
- MyFICO.com: What's in Your FICO Score?
- DailyFinance: 5 Surprising Things That Hurt Your Credit Scores
- Bankrate.com: Closing Credit Card Dings Credit Score
- MSN Money: 5 Ways to Kill Your Credit Scores
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