Black Friday is 3 days away. It’s the official start of the 2010 Holiday Shopping Season.
Sales are expected to top $111 Billion this year and, already, businesses are vying for shoppers and their dollars. Newspaper circulars are getting larger, and in-store discounting is more prevalent.
But one discount that shoppers should think twice about is the popular “Open A Charge Card, Save 20%” promotion. The short-term savings may be tempting, but the long-term costs may be huge.
Why? Because of how credit scores work.
According to myFICO.com, “new credit” accounts for 85 out of 850 possible credit scoring points, with new credit defined by such traits as:
- Number of recently opened accounts
- Number of recent credit inquiries
- Time since recent credit inquiries
- Proportion of new accounts to all accounts
These traits are negatives against a FICO score, so with each new in-store credit card application, a person’s credit score will fall. The fall will be especially pronounced for persons lacking credit “depth”, or who have made a disproportionately large number of new credit applications recently.
For soon-to-be homeowners, or would-be refinancers in Riverside and San Bernardino county , credit scores are worth keeping high. This is because Fannie MAe, Freddie MAc, and HUD/Ginnie Mae penalize a borrowers ability to qualify for the lowest interest rate and/or charge the borrower higher fees to receive the lowest interest rate possible. The penalty is mandatory and not some random evil attempt by your mortgage bank to rip you off.
It’s expensive to have a low credit score — more expensive than the money saved by opening a card at the mall, anyway.
As an illustration, assuming 20% equity on a $200,000 conforming loan:
- 740 FICO : No added loan costs
- 720 FICO : 0.250% increase in loan costs, or $500
- 700 FICO : 0.750% increase in loan costs, or $1,500
- 680 FICO : 1.500% increase in loan costs, or $3,000
- 660 FICO : 2.500% increase in loan costs, or $5,000
That said, if you know you won’t need your credit for a mortgage within the next 6 months, the risk of applying for in-store credit cards is likely small. But if you’ll need your FICO soon, consider paying for your gifts full price.