Picture this…
You’re at the front of the line, you’ve got all of your brand new clothes in your arms ready to purchase as the salesperson is checking you out. Your total is maybe more than what you thought and then you hear, “Would you like to get 20% off by opening a credit card with us?”
We’ve all been there.
Sure, the thought of getting 20% off is enticing, but before you open the card, consider how it will affect your credit score.
Before making the decision to fill out the application, take a breath, step away from the line and consider the type of shopping habits you have and compare those to your ability to manage your debt and pay bills when due. Still want that 20% off?
What are Retail Credit Cards?
Retail credit cards are issued by retail stores and most can only be used to shop at that specific store. Most of the time, a retail credit card will come along with some type of rewards program that encourages the buyer to frequently use that card there. Some retail cards offer co-branded Visa or American Express cards to be used like a normal credit card.
An example of a retail credit card could be a Victoria’s Secret Angel credit card. This credit card will get you 20% off when you sign up for it and also comes along with angel card benefits. These benefits can include:
- Free shipping.
- Earning points for every dollar you spend.
- Access to sales earlier.
- Birthday gifts/perks.
But, what does this card do to your credit score?
Retail Credit Cards and Your Credit Score
As we all know, your debt has a direct impact on your credit score. It also has a direct impact on your ability to borrow money for things that you may need (like a mortgage loan) later in life. The amount of debt you have is one of the biggest factors that plays into your credit score. If you open multiple retail credit cards to save money, you could actually be losing out.
Say you have five different retail credit cards with high balances on all, this could have major negative impacts on your credit score. The higher your balances are compared to the credit limit, the more it hurts your credit score.
It’s not impossible to improve your credit score, but it is tricky. So, if you can we suggest keeping your balances low and being sure you always make your payments.
But, what happens if you miss a few payments?
Well, it could have lasting effects on your credit.
Missed Payments
After missing one payment, you will be charged a fee up to $40 for not paying on time.This fee gets added to your balance and starts accumulating interest based on your APR.
When you have two to three missed payments, this could lead to more late fees, increased damage to your credit score and possibly getting your account closed down.
If for some reason you have multiple missed payments it can be crippling to your credit score and you could be hit with a lawsuit.
How Does this Affect My Mortgage Qualification Process?
Unfortunately, debt isn’t something that just disappears. When you go to apply for a mortgage it is something that the loan officer will see and can deny you the loan for. This will be a MAJOR red flag, because if you can’t make your payment on a store credit card,then how are loan officers supposed to trust that you can make a payment on your mortgage? The answer is: they can’t.
The best advice we can give is to make sure you are paying off outstanding debts like retail credit cards before applying for a mortgage. This way, we can give you a fair chance to make sure you are qualified to make the payments. Contact Mid America Mortgage to discuss your mortgage needs today!
