If you have ever shopped at a retail or department store, you no doubt received an invitation to open a store credit account. Cashiers extend this invitation at checkout, and if approved for financing, you can save about 10% on your purchase. Not a bad deal, especially if you frequent the retailer. But before handing over your name, address and Social Security number, there are a few things you should know about signing up for credit cards at checkout. In-store applications seem harmless and an excellent way to reduce your final bill, but these applications can have a negative impact on your credit rating.
What is a Credit Inquiry?
Applying for any type of credit – auto loan, mortgage, credit card or student loan – triggers a credit inquiry. Inquiries appear on your credit report and occur each time a creditor or lender checks your report. Submitting an application for a loan or credit card, as well as completing an instant approval application at checkout triggers an inquiry. If you don’t know how credit works, you may not understand the significance of inquiries.
How Signing Up for Credit Affects Your Score?
Inquiries are not harmless. In fact, each inquiry reduces your credit score by up to five points and they stay on your credit report for two years. Granted, a five-point drop in credit score isn’t a huge deal if you have a high score and only apply for one or two credit accounts in a two-year period. But if you have few credit accounts, a low credit score and you frequently apply for credit cards at checkout, you can severely damage your credit score.
For example, if you have a 680 credit score and you apply for seven retail credit cards at checkout, this seemingly harmless action could potentially knock as much as 35 points off your credit score. This can drop your 680 credit score to 645.
Different Types of Inquiries
While signing up for a credit card at checkout counts as an inquiry and can reduce your credit score, not all inquiries are bad. There are two types of credit inquiries: soft inquiries and hard inquiries. A credit application prompts a hard inquiry and these include credit checks by lenders and creditors. Hard inquiries are the types of inquiries that can hurt your credit rating.
Soft inquiries do not hurt your credit rating. These types of inquiries include your own request for a credit report. You can order your personal credit report from each of the three reporting bureaus — as often as you like — and these requests do not count against you. Additionally, soft inquiries include credit checkups by your existing creditors. An existing creditor may check your credit report before lowering your interest rate or increasing your credit limit. Before mailing a pre-approved credit card offer, a credit card company may also conduct a soft inquiry to prequalify you.
There is nothing wrong with applying for credit or taking advantage of credit card offers at checkout, but moderation is importance. Only apply for credit when necessary. Credit inquiries, in general, have little impact on credit scores — making up only 10% of your credit score. Occasionally applying for a new account is not likely to ruin your credit score, but if you get credit happy and take advantage of every invitation for in-store credit, your credit score will suffer.