Be wary of getting more credit when student loan comes due
Dear Credit Care,
I
just applied for a department store credit card and received an approval of
$500. I am barely starting my credit. I do have a school loan worth $14,000
coming up, and I wanted to know if it would be a good idea to cancel my
department store credit card when I receive it? If so, how bad would this
affect my credit score? I forgot to mention I do own a bank-issued credit card
and am paying on time as we speak.-- Yesenia
Dear Yesenia,
I'm
glad you wrote. Your credit history can affect much more than your ability to
obtain future credit; it can also affect whether you are approved for a lease, hired
by a new employer or receive a promotion at work. So, it is important to keep
your credit in the best shape it can be at each period of your life. You are
just starting to build a credit history and you will want to avoid as many
mistakes as you can along the way. Life does happen and may contribute to some
bumps in your credit history, but you can do your best to keep any credit
damage to a minimum.
The
answer to your question of whether to cancel your department store credit card
depends on a couple of things. First, how do you plan to use the card? If you
have the discipline to use the card only for purchases that you can pay off
when the statement arrives, it may make sense to keep it. However, if you
believe it is more likely you will end up charging to your $500 limit and
carrying a balance from month to month, then it may be better to cancel the
card. Department store cards typically have high interest rates, so carrying
a balance on one can get expensive quickly.
Second,
does the card fit in with your overall financial goals/plan? Many people obtain
department store cards at the point of purchase to receive a percentage off of
the purchase or to obtain some other incentive. What many fail to realize is
the potential impact the card could have on their credit histories. For
example, the available credit on the card may push your utilization
rate above a comfortable level for other potential creditors. Opening a credit card account
should be planned to ensure it fits with your spending habits and your financial
situation, not as an impulse when shopping.
With
$14,000 in student loan debt, I would encourage you to consider one more important
thing when debating whether to obtain additional credit: your current income,
or what you project your income will be once you have finished school and begin
working. You will want to keep your nonhousing debt to less than 10 percent of
your gross income if possible. If you are able to do so, it will be much
simpler to qualify for a home mortgage when you are ready to buy a house. I
realize that purchasing a home may be well into your future, but keeping your debt-to-income ratio in line will also keep you from ending up with a debt burden that could
cause you financial problems and damage your credit.
Handle
your credit with care!
See related: How your FICO score is calculated: Payment history, 5 federal laws that protect cardholders, TransUnion asked to limit employer access to credit reports
Kim McGrigg is the community manager for Money Management International, the largest nonprofit, full-service credit counseling agency in the United States. You can find more money management advice on Blogging for Change and MMI's Facebook page.
Credit Care answers a question about a debt or credit issue from a CreditCards.com reader each week.
Send your question to Credit Care.
Published: November 28, 2011
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