You’ve heard the speech before at the checkout counter, especially as the holidays near. It usually sounds like “Would you like to save 10% on all your purchases today be applying for our store credit card?”. It sounds like a great way to save $20 or $30 dollars (or more?), but is it really worth it?

Probably not! Especially when you consider the possible damage to your credit score.

First, a little review about how your credit score is calculated. Although the actual algorithms are  secret, we do have a pretty good idea of the weight of each of the five categories that go into figuring the score. They are as follows:

Past delinquencies – 35%

Revolving debt ratios – 30%

Average age of credit file – 15%

Mix of credit – 10%

Inquiries – 10%

If we look at the new credit card as a whole, this is what we find.

1. A new inquiry – the credit card issuer is going to check your credit report to make sure you qualify. A low score or recent bankruptcy could cause you to be turned down, but the inquiry could still impact the current score by 3-5 points.

2. Average age of credit – If most of your other tradelines are years old, a new credit card could lower your average of credit and lower your score. While the impact could be small, it all factors into the overall score.

3. Revolving debt ratios – this is where most of the damage happens. Often times, the limit is very close to the amount charged causing the utilization ratio of your other cards to increase. For instance, charging $180 on a card with a $200 limit equates to a 90% utilization ratio. That number independently and averaged in with your other revolving credit could cause a hefty drop in your score.

Worse yet is that the credit scoring models tend to look harshly at store cards (that can’t be used anywhere except in that store) and will penalize you accordingly.

Overall, someone who has a score in the high 600s could see a drop in the area of 50 points. This is especially important if you are in the process of purchasing or refinancing your Indiana home and need a 640 minimum score!

Thinking of just maxing out your current cards? Probably not a good idea for all the reasons I mentioned above.

BTW, if your loan is backed by Fannie Mae or Freddie Mac, and you meet a few other criteria, you may be able to refinance your existing mortgage even if you owe more that the house is worth. See my post on HARP. While some of the lending standards are relaxed, you will still need a good credit score.

Scott

Your Indiana mortgage expert specializing in FHA, VA, and USDA Rural Development loans.