As the big holiday shopping season begins consumers will be faced with the common question “would you like to open a new store card and save 10% on all your purchases today?” This may sound like a sweet deal, but don’t be tricked into a decision that could hurt your credit!
First, every time you apply for new credit (whether you are approved or not) a hard inquiry is added to your credit file. Hard inquiries do lower credit scores. It’s ideal to have only about one hard inquiry every 3-4 months to minimize the impact on your credit scores. When you start to have a number of inquiries in a short time they can impact your scores 3-5 points … each!
Second, when you open a new account it initially causes your credit scores to drop. This is not because the account is “bad” but because it doesn’t have “noteworthy” payment history yet. Essentially, a new potential lender looking at your credit does not yet know how you will manage this new account. That makes you look riskier as a new borrower and your scores reflect that.
On the plus side, if you do intend to use the new account on a semi-regular basis and keep it paid on time… then over time the new account will help raise your credit scores. After about six months of reported on time payments the new account will in fact boost your credit scores. So if you really plan to shop at that store on a semi-regular basis then the initial savings is worth it and in time your credit will thank you too!
The best way to manage a credit card so that it contributes the most to your good credit scores is to keep it active, at least the minimum due always paid on time, and the balance at or below 30% of the credit limit. The longer such an account is open the higher the scores can go!