There are several credit scoring reasons not to open a store card. I will focus on just one of the two primary reasons.
Activity determines 10% of a credit score. This amounts to 85 credit scoring points.
The first negative to the credit score will be the result of the inquiry by the new credit card company into your credit. The Credit Scoring System views the inquiry itself as enough activity to lower the credit score.
The number of points a person’s credit score will drop from just one inquiry is small but if other factors come into play (which they do in this scenario) the reduction in score can be multiplied to protect the credit bureau’s client (the lender) from future risk. This drop in credit score is merely a “be careful” warning by the Credit Scoring System.
The second negative to Activity is opening a new account. This new account would also have only a small negative impact by itself. The Credit Scoring System views all new activity as a negative and when added to the inquiry, this credit score will drop enough to be noticeable.
For a consumer that already has ten open accounts, adding an eleventh account will not lower the credit score dramatically. Adding one new account really only represents a 10% increase in the number of open accounts. (Please note that closed accounts do not factor into this scenario.)
Someone who has only four open accounts and decides to sign up for a new store credit card will be increasing the number of accounts by one. But on a percentage basis that one account is a 25% increase. With 85 credit scoring points at risk, a 25% change (activity) is equal to 21.3 points. Plus the inquiry on the credit will negatively impact the credit score as well. The Credit Activity portion of the Credit Scoring System will quickly lower a score as you can see....and that factor is just one of the reasons to avoid opening a store credit card.
EXCEPTION TO THE RULE:
The only time I recommend opening up a store credit card to one of my clients is when they are trying to establish or re-establish credit. Store cards are easier to obtain than some other sources of credit so for those who have filed bankruptcy, are going through a divorce, or young adults can benefit by opening up a store credit card. Only to establish or re-establish credit please!
I will address the second negative factor to opening store credit cards: "types of accounts" in a future blog.