Summer vacation is nearly over. And while parents are largely focused on the looming first day of school and making sure their students are properly geared up for day one, it’s also important that parents gain awareness of the common credit mistakes that they may be tempted to make during the time when they’re getting their kids ready for the school bus.
All students need new school clothes, most likely because they’ve outgrown the clothing they wore last year or they’re trying to stay current with the trends. That means that you’ll probably be spending time with them at the mall visiting a variety of the national retail chains or you’ll be doing some online shopping. Almost every store will be offering a discount on your purchases if you’re willing to apply for a new store credit card. Generally, this isn’t that big of a deal. But, you should be aware of how the application for new retail credit cards may affect your credit scores.
First, every time you apply for a credit card, the lender is going to pull one of your three credit reports. That means a new credit inquiry will appear on one of those reports. Inquiries can lower your credit scores, although the impact is generally minor at worst and negligible at best. But, if your credit scores are already marginal, then every point is important. As a result, a few new inquiries may make the difference between obtaining an approval or a denial, and between a higher or lower interest rate.
Next, when you apply and are approved for a new retail store credit card, it’s only a matter of time before the account, which is formally referred to as a “trade line,” will be reported to the CRCs and find its way to your credit reports. Newly opened accounts will lower the average age of the accounts on your credit reports. That’s a mathematical certainty. This too can lower your credit scores, potentially more so than a few inquiries.
Finally, retail store credit cards almost always have very low credit limits, many times lower than $1,000. This means that even modest purchases can lead to a heavily leveraged credit card account. This too can lower your credit scores. This is referred to as your balance-to-limit ratio, and it’s a very important metric in your credit scores. You want to keep that ratio as low as possible to prevent your credit scores from dropping.
This does not mean that you should avoid buying school clothes, and it certainly doesn’t mean you should avoid taking advantage of the benefits afforded by using a newly opened retail store credit card to make your purchases. But, you should pay attention to the potential negative impact to your credit scores. And, if at all possible, you’d be wise to pay off any newly incurred school shopping debt well before you go out and apply for something like a mortgage or auto loan. That will ensure your credit scores are in the best shape possible at the time of your application.
Disclaimer: The views and opinions expressed in this article are those of the author John Ulzheimer and do not necessarily reflect the official policy or position of VantageScore Solutions, LLC.