Black Friday is 3 days away. It’s the official start of the 2010 Holiday Shopping Season.
Sales are expected to top $111 billion this year and, already, businesses are vying for shoppers and their dollars. Newspaper circulars are getting larger, and in-store discounting is more prevalent.
But one discount that shoppers should think twice about is the popular “Open A Charge Card, Save 20%” promotion. The short-term savings may be tempting, but the long-term costs may be huge.
It’s because of how credit scores work.
According to myFICO.com, “new credit” accounts for 85 out of 850 possible credit scoring points, with new credit defined by such traits as:
- Number of recently opened accounts
- Number of recent credit inquiries
- Time since recent credit inquiries
- Proportion of new accounts to all accounts
These traits are negatives against a FICO score so with each new, in-store credit card application, a person’s credit score will fall. The fall will be especially pronounced for persons lacking credit “depth”, or who have made a disproportionately large number of new credit applications recently.
For soon-to-be homeowners, or would-be refinancers , credit scores are worth keeping high. This is because credit scores change the mortgage rates and/or loan fees for which an applicant is eligible.
As an illustration, assuming 20% equity on a $200,000 conforming loan:
- 740 FICO : No added loan costs
- 720 FICO : 0.250% increase in loan costs, or $500
- 700 FICO : 0.750% increase in loan costs, or $1,500
- 680 FICO : 1.500% increase in loan costs, or $3,000
- 660 FICO : 2.500% increase in loan costs, or $5,000
It’s expensive to have a low credit score — more expensive than the money saved by opening a card at the mall, anyway.
That said, if you know you won’t need your credit for a mortgage within the next 6 months, the risk of applying for in-store credit cards is likely small. But if you’ll need your FICO soon, consider paying for your gifts full price.