In the next few weeks, you can be almost certain of several things:
- You’ll fail in your efforts to avoid “All I want for Christmas is my Two Front Teeth” and “Grandma Got Run Over by a Reindeer.”
- You’ll hear many offers of shopping discounts in exchange for opening credit card accounts at your favorite retailers.
- You’ll spot nearly as many articles warning you about the peril for your credit score of applying for and opening new accounts just to save a few dollars on holiday purchases.
But while it’s true that applying for new credit, in the form of retail store cards, other credit cards, or other loans can lower your credit scores, it’s certainly nothing that must be uniformly avoided. Some folks should definitely think twice, but for others it might be perfectly fine to accept those attractive discounts.
For the majority of people, applying for one new retail store credit card to save 15 percent on holiday purchases has practically no significant impact on credit scores. Here’s what happens:
When you apply for a card, the issuer pulls your credit score from one of the three national credit reporting companies (CRCs) – Equifax, Experian, or TransUnion. That causes the credit report compiled about you by that CRC will reflect a “credit inquiry,” or a record of the pulling of your score. Inquiries can cause your scores to be lower, but their impact is confined to that one credit report, rather than those at all three CRCs.
Inquiries are the least important factor in your credit score, meaning they have less influence than any of the other scoring categories. In the VantageScore credit scoring model, inquiries are considered to be worth only about 5 percent of the points in your score. That means if you’ve got a solid credit score, you can apply for a credit card and not have to worry about a meaningful impact.
You should also be aware of a secondary impact opening a new retail card can have on your credit scores. One measurement used by credit scoring models is the average age of the accounts on your credit reports. The higher that average, the better it is for your score. Opening new accounts of any type lowers that average age, and thus has some negative influence on your score. However, as with credit inquiries, the impact of that age metric is very modest. If you already have a good score, a new account shouldn’t lower it to a point where it would cause you any problems.
As long as you continue making payments on time, and you keep your charge balances well below your spending limit (VantageScore Solutions recommends 30 percent or lower), your score should rebound within a few months from any reduction caused by an inquiry or opening a new account. If you plan on applying for a significant loan in January, such as a mortgage or car loan, it might make sense to avoid any reduction in your score, and foregoing those retail-card come-ons might be wise. But otherwise, if your score is healthy and you find yourself wanting to open a new credit card this holiday season, go for it.
Just be cognizant of the possible downside to doing so, relative to the money you’re going to save. As with all things credit related, moderation is the key.
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