The holiday season is now over and
for many comes the real downer of figuring out how much money they spent on
credit cards and what they should do with the new retail credit cards they
opened. While I express to people all of
the time to avoid that situation sometimes that advice is ignored because the
temptation of the instant discount off your current purchase at the register is
just too much for some. Now that the
dust is settled and you have this new card many are left thinking, “I will just
close it right away and whatever damage I just did to my credit score will be
fixed.” To add to that, there are
several “experts” out there that will tell you having a retail credit card is
bad for your FICO score and the faster you close those cards the better. What should you do? Let’s take a closer look
at this scenario, but this time with accurate factual information.
First off, next year and moving forward if you are in doubt
as to whether you should apply for the retail credit card or not, don’t! The
reason they are giving you the immediate discount is because a lot of people
will pay more in interest over time than the discount they are actually saving
in the first place. These companies are
not dumb. They understand the human spending habits as
well as the fact that IF they can get a credit card in your pocket with their
name on it, you are much more likely to buy things you can’t afford right now and
then pay them extra interest over time on those purchases. Retail cards are infamous for their
subprime-style terms with interest rates well into the 20’s and credit limits
as low as a few hundred dollars. Using and carrying a
retail card balance will quickly add to the balance and with such low credit
limits, modest purchases can result in highly leveraged cards, which lowers
your credit score as a result.
But since we can’t go back in time and reverse the
application for the new retail credit card you agreed to, let me give you three
possible solutions with what to do with the account now:
Close the card immediately
Many people will close the card right
away because they only opened it for the discount. That’s fine but you should
be aware that closing it doesn’t do away with any damage you’ve already caused
to your credit by opening it. The credit inquiry that was posted by the issuer
(or issuers) when you applied will still be there and they can lower your score
for the next 12 months. And, the newly opened account (or accounts) will be on
your credit report likely for the next decade.
Close
the Card… Eventually
I believe that if you don’t close the
card immediately you shouldn’t close it ever. The unused credit limit, although
a small one, is likely helping your credit scores because credit scoring
systems like unused credit limits. By closing the card you will lose the value
of the card’s unused credit limit. You will, however, still get the benefit of
the age of the account, open or closed. There’s a pretty common myth that when
you close a credit card you lose the benefit of the account’s age, which is not
true. Also retail credit cards don’t charge monthly or annual fees (although
that can certainly change), so the cost to simply hold on to the card is $0.
Never
Close the Card
If you never close the card, then
you’ll always benefit from the card’s unused credit limit, assuming you don’t
run up a large balance. You’ll also always benefit from the account’s age
because the credit bureaus won’t remove the account from your credit report,
which they’ll likely do after the account has been closed for 10 years. If you made the mistake and opened the new
card don’t make it worse by making another poor choice. Keep the card open!
