Retail Credit Cards and Your Credit Score

If you are shopping in the brick and mortar world this season, you are probably being accosted by store employees urging you to sign up for a credit card through the store you are in. Sure, it sounds attractive to get the 5% discount on everything you are buying today, but is it really a good deal?

Here’s where a little knowledge about how credit works can benefit you in the long run. The first thing I do in an initial meeting with a client is go through their credit report line by line. I explain how each account on the report impacts the overall credit score, and we discuss long term strategy to maintain or improve credit ratings. A credit card is considered “revolving credit,” meaning you always have access to funds, and you can charge up a balance and then pay it off, and the cycle repeats itself or “revolves.” There are several factors you should consider when you open a retail credit account.

1.) Credit Inquiries: Every time a potential lender checks your credit, it has an impact on your score. Applying for a new credit card may impact your score by a few points.
2.) Time Since Last Account was Opened: Opening new credit may lower your credit score. The longer your accounts have been open, the better.
3.) Proportion of Balance to Credit Limit: Retail credit cards typically have a low credit limit. To optimize your scores, keep the balance on your revolving accounts below 1/3 of the available credit.

When you apply for a mortgage, your credit score is a huge factor in determining what loan products you qualify for. While you may save $10 today by opening that retail credit card, is it worth jeopardizing your ability to get the best rates on a mortgage in the coming months?

Something to think about! Feel free to add a comment to this entry with your questions or thoughts!