Credit score impact of store card financing deals


Opening Credits
Columnist Erica Sandberg
Erica Sandberg is a prominent personal finance authority and author of "Expecting Money: The Essential Financial Plan for New and Growing Families." She writes "Opening Credits," a weekly reader Q&A column about issues for people who are new to credit, for

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Question Dear Opening Credits,
I've never had a credit card before and am wary to open one due to my parents' warnings about fees and debt. I want to get a new couch for my apartment and though I have a job, I don't want to make a $1,000-plus purchase right now.

The store I want to buy the couch from offers six-month financing if you open a credit card with them, but I'm nervous because the card has a 27 percent APR but no annual fee. If the only thing I buy on the card is the couch and paid the full balance each month during the six-month period, would I be charged any extra fees? If I cancel the card after I've paid off the couch, would that damage my credit score in the long run? Again, I've never had a credit card in my life, but my credit score is in the high 700s because of college loans and a line of credit in my name connected to my parents' account. I just want to be sure that I understand the ramifications before I do this! -- Hailey


Dear Hailey,
Your mom and dad an amazing job emphasizing the problems associated with improper charging! But while it's essential to understand all the drawbacks of credit cards before getting one and using it, you also need to know the advantages as well as correct credit management.

Many retailers offer credit cards to customers who qualify with the option of 0 percent financing for furniture and appliances. As long as you repay the entire balance before the fixed time frame ends, the purchase price is what you pay -- no fees attached.

Here's the catch: They're not interest-free deals, they're interest-deferred deals. Interest builds from the moment you borrow, accumulating in the background. If you fail to satisfy the entire balance by the time the promotional period ends, all the interest that would have been added to the debt from Day 1 will be added to the balance on the next bill.

To prevent that from happening, you'll have to make sure you can and will pay what you owe in six months, tops. The calculation is simple: $1,000 divided by 6 equals $167. Sending that sum will be sufficient to pay the debt in time. If I were you, I'd increase it to at least $200. This way you will be out of debt in five months and free from worry as well as the extra costs.

As far as canceling the account when the deal is done, it depends on the type of card it is. If the card can only be used at this particular store, its use to you will be limited. However, if it's a card that can be used at other retailers and is co-branded with either Visa or MasterCard, for example, then it might be a good idea to keep it open.

A long history of using a particular account will help your FICO scores increase. By opening the card, spending a large sum and then deleting the debt quickly, you'll be establishing an amazing relationship with the lender that will be recorded on your credit reports. If you were to cancel the card, that data will remain on your report for 10 years and will be factored into your scores. Newer information is weighted most heavily, though, so as it ages, all that good work will have less impact on your scores.

All this means is that you can get the sofa of your dreams with no fees attached as well as maintain your already great credit score by following through with the payments, and then using the card occasionally if you can. Always pay on time and in full. This way you'll be constantly adding positive information to your credit reports. After that, you can disengage from your parents' account and be entirely independent!

Oh, and the APR you cite is quite high. That won't matter if you never carry over a balance, but it will if you ever want to pay for something in installments. When you're all done paying for the sofa, sit on it and call the store's credit division. Ask for a lower interest rate. Based on your fabulous credit rating, they should abide. If they don't, you can keep the account active, but also consider applying for a card you can use anywhere and that comes with more favorable terms.

Your goal is to find a good card that fits your credit rating and lifestyle and apply for it. Once you have that new card in your hands, feel free to cancel the store card. Your credit score will bump around during all this activity, but should settle down once the sofa is paid off and whatever card you decide to keep gets comfortable in your wallet.

See related: 0 percent credit cards: A sweet deal if played right

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Published: September 2, 2015

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Updated: 10-20-2016

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