Store Credit Cards: Part 2

This is a companion response from the August 11th blog on opening up store cards...yes or no?

There are several credit scoring reasons not to open a store card. For this blog entry I will focus on the second of the two primary reasons.

Credit Activity

Credit Activity was discussed in the 8/11/10 blog.

Activity determines 10% of a credit score. This amounts to 85 credit scoring points.

Types of Accounts

The Types of Accounts portion of the credit scoring system also accounts for 10% of the credit score. When a person has accounts that are deemed less desirable (like store credit cards) the risk to the credit score is up to 85 points. Review this chart for a list of the highest ranked categories of debt.

  1. Mortgage
  2. Auto, personal, or student loans
  3. Major national credit cards (Visa, MasterCard, Am. Express, Discover)
  4. National store cards (Sears, JCPenney, etc.)
  5. Regional store cards (Dillards, HHGregg, etc.)
  6. Finance companies
  7. Gas cards

The Credit Scoring System assigns a value to the types of open accounts that we have in our credit file. The chart lists the most desirable account first, second most desirable, third and so on. A mortgage is the best credit to have while gasoline cards are the worst type of credit. The more undesirable accounts a person has, the fewer credit scoring points of the possible 85 will be awarded.

Store credit cards are ranked 4th on the list of accounts. If a retailer is only a regional chain, that ranking could be as low as 5th on the list. Whether 4th or 5th in value, store cards are clearly not the most desirable accounts to have in a credit file. Depending on the scope of the current credit file and other factors, opening a new store card will lower your credit score.

Here is a real life example:

I was working with a first time home buyer named Jane. When I met Jane she had a credit score of 689 on May 20th. She was looking for a home and I pre-approved her for an FHA mortgage. Once she found the perfect house, I pulled her credit again on August 2nd. To my dismay, Jane had gone out and opened two new credit cards. Her score had dropped by 39 points to 650 in 74 days. The Credit Scoring System quickly recognized that this young borrower had allowed two creditors to check her credit (negative impact), opened two new accounts (negative impact), and the accounts were so new that they rated her as “too new to rate” on pay history (generally need 6+ months of history before a positive impact to the credit score). Her score dropped 39 points.

Obviously opening a couple of new credit cards cost Jane 39 points on her credit score and resulted in a slightly higher rate on her loan for 30 years. She and many others have made smart financial decisions that can cost considerably more in interest over 30 years than they saved by opening a store card.

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