Taking on more credit won't hurt a good credit score
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Dear Credit Score Report,
I just purchased a carpet with a 12-month, no-interest offer on a new credit card account with Lowe's. The card has a $12,000 limit, since I have good credit. The carpet was only $1,500, and I have no need for more. Will adding this much credit hurt my score? -- Christine
As someone who is a responsible borrower, adding more credit isn't a cause for concern, provided you keep up your good habits and always make your monthly payments.
Your careful credit habits -- which likely include always paying bills on time and not taking on too much debt -- have earned you a good credit score. That new account with Lowe's may initially cause your score to fall slightly, due to the so-called "hard inquiry" when you applied for the card. Your credit could also be impacted by a change in the comparison of your total debt to credit limits, which is also known as your credit utilization ratio. However, by gaining access to more credit, but using relatively little of it, you could actually benefit your credit score over time. Paired with your already solid credit history, you have little reason for concern: Any damage to your credit score will quickly be erased by your good borrowing habits.
Although hard credit inquiries can impact a new cardholder's credit score, the drop is negligible. On FICO's website, the creator of the most commonly used scoring model says a hard inquiry typically shaves fewer than five points off a borrower's FICO credit score. In your case, the score damage might be even less severe, experts say. "An inquiry represents potential new debt that isn't yet shown as an account in the credit report. If a person has had issues managing their credit, that potential new debt represents lending risk," says Rod Griffin, director of public education for credit bureau Experian. "If a person has had no issues, that potential new debt represents little or no risk, so has very little or no impact on the credit score."
Soon after your new account is active, its associated debt and credit limit will begin appearing on your credit report. "We at Lowe's don't report to these three credit bureaus; however, our credit card is serviced by G.E. Money, and they do report credit to these three services," says Lowe's spokeswoman Karen Cobb. Therefore, G.E. Money's name will appear on your credit report alongside that account's information.
That new account could alter your utilization ratio, potentially impacting your credit score. For example, let's say you have another credit card with a balance of $500 and a credit line of $10,000, meaning you are using 5 percent of your total credit. You then open that Lowe's account, increasing your total debt to $2,000 and your total credit line to $22,000, for a utilization ratio of 9 percent. Your higher utilization ratio puts you closer (in this case only slightly) to maxing out your lines of credit, although still well below the recommended 30 percent utilization ratio.
Once again, your good credit history should protect you. "Taking on new debt puts additional demands on our ability to repay it. The higher your overall credit usage, the greater the risk because you are stretching your financial resources," Griffin says. "But, like inquiries, if you have a history of good credit management, that impact will be minimal. After a few months of making the payments on time, her credit scores would likely bounce back up to their previous level because she has demonstrated that she can manage the new debt."
It's also possible that higher limit could help you from the get-go. In this scenario, let's say you have an existing card with a balance of $5,000 and a credit line of $10,000, meaning you are using half of your available credit. Combine that with your Lowe's account, and you have a $6,500 total balance and an overall credit line of $22,000. Now, instead of using 50 percent of your credit, you are using about 30 percent -- a lower percentage that should help your credit score.
Although lenders once viewed high credit limits as a cause for concern, that stance has changed, experts say. "In the past, lenders were concerned about consumers having too much credit available to them. The risk was that they would suddenly charge to the limit, get over-indebted and be unable to repay the debt," Griffin says. "Today that is less of a concern than a consumer's utilization rate."
While protecting your credit score is your main concern, there's another reason to regularly pay down that debt. Although the Lowe's card account isn't charging interest for the first year, new regulations mean you still need to make monthly payments to avoid being charged any fees. "Prior to this, we frequently offered the no interest, no payment for a specific amount of time," Cobb says. Not anymore. "Now, under the new Credit CARD Act, you are now required to make that minimum monthly payment," Cobb says. If you fail to pay on time, expect fees. As outlined in G.E. Money's terms and conditions, your "account is subject to late payment fees if the minimum monthly payment isn't made," Cobb says. Additionally, once those 12 months are up and a balance still remains on your account, interest charges can be assessed retroactively.
By continuing to exhibit good borrowing habits and paying off your new debt, you'll protect your credit score while avoiding fees and interest charges.
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