You’ve gotta love the store credit cards. They are so easy to get. You just fill out one little part of a tri-fold brochure, invest all of five minutes, and boom! You have a credit card to use every visit you make. But that’s not the best part. The best part? The discounts.
“Sign up today and get 20% off your purchase!”
“Sign up today and get 5% off purchases every time you come back!”
“Sign up today and receive EXCLUSIVE offers and discounts!”
I decided to write today based on a question I got from a participant in one of our classes. They had signed up for the credit card to get the big discount. But it was a one-time purchase and they don’t ever plan to go back to that store, let alone use the credit card. So now what? What do you do with the card? Cancel it? Keep it? Now what?
I think just about all of us have done this at some point. It was a great deal at the time, but figuring out where to go from here can be a little complicated. There are a lot of different ways to look at this issue and different ways that it will affect you.
Because we are all in different situations with different habits and goals, that’s really the place to start. Where do you want to end up and what do you want to get out of this? Specifically concerned about buying your first home? Or perhaps you don’t trust yourself with an open line of credit. Working towards a higher credit score to reduce your insurance premiums? What you do with the card may change depending on which of these is most important to you.
Here are different perspectives and how that card may affect your credit score.
Debt Management – If you are going to be tempted to use that card every time you think about it, it may be worth it to close the account. After all, if you max it out and then ‘have to’ miss a payment, it certainly isn’t going to help your credit. But in this case, the card can only be used in a specific store that the individual doesn’t ever plan to return to. So, ongoing debt management probably isn’t too much of an issue here.
Credit Usage – Another consideration in calculating credit scores is your usage ratio. Of your available credit limit, what percentage of that are you carrying in actual debt? The higher the usage ratio, the lower your credit score. In this case, if they are carrying debt on other cards, they may want to keep this one open to hold their over-all credit limit up. Because they won’t shop at the store again, it will keep their usage ratio down. But, if they don’t use their other cards much, their ratio is already low and closing this card probably won’t affect it much. After all, FICO will let you carry 20% of your credit limit in debt before your score starts to go down.
Credit Age – 15% of your credit score looks at the average age of your lines of credit. Basically, the longer you can keep accounts open, the higher your score is going to be. For an average credit age, you probably want to aim for 9-12 years. In the case above, if the store credit card is an older card compared to their other accounts, they may want to keep it open as it will increase their average credit age. On the flip side, if the store credit card is fairly new or their other lines of credit are well-aged, closing the store card may actually increase their average age.
Credit Mix – The FICO credit score bases 10% of your score on your credit mix. In other words, are you diversified? Do you have a combination of revolving credit (credit cards) and installment credit (mortgages, car loans, student loans)? Can you multitask? In the illustration, if the store card is their only line of revolving credit and they close it, they will not be very diversified and their score will drop. But who really only has one credit card these days? So again, closing one of a few credit cards may not have much of an impact if they really do have other cards.
Credit Inquiries – Finally, 10% of your credit score is based on how many hard inquiries you have. A hard inquiry is any time a lender pulls your credit report in consideration of giving you a new line of credit. The more hard inquiries in a year, the lower your score. Because the individual in our example already has the card, neither keeping nor closing it will impact their score based on the number of inquiries. Instead, this is the one to consider whenever a store employee first offers up that sweet tease of rewards.
Long story short, what do you do with that card? Well….. that depends. I wish I could give you a more precise answer, but chances are it wouldn’t fit your unique situation. Instead, my point is to make all of your credit decisions, before and after getting a card, very intentionally with thought ahead of time.
Take a look at each of these different aspects in relation to your own credit situation. With a little review, it may quickly become clear what you need to do. In fact, I hope it is easy for you to figure out.
If you have already gotten yourself into more debt than you care, the counselors at the Center for Financial Resources can help. We don’t have cash to make the debt go away, but can help you figure out your goals and lay out steps towards achieving those goals. You can schedule a confidential appointment either online or by calling us at 605-330-2700.
written by Breck Miller
images courtesy freedigitalphotos.net