Retail cards: build your credit score and save 10 percent

This post originally appeared October 16, 2014, on as “Retail cards, the Rodney Dangerfields of credit, deserve respect

By Barry Paperno

Dear Speaking of Credit,
I’m wondering if closing an unused department store line of credit would be beneficial or not? Let me give the details. The line has been open since January and has not been used. I have two active accounts on my credit; the oldest one is one year. The department store card’s credit line is for a minimal amount, but since I don’t use it, would this ding my credit if I were to close it? What would you recommend? — Charles

Dear Charles,
I’m glad you brought up the topic of department store cards, which, to me, are the Rodney Dangerfields of the card world: They get no respect.

Department store cards have come under much criticism in recent years for being harmful to credit scores. Especially during the holiday season, credit experts warn about the damage that can come to your credit from accepting an offer to open a new credit account with a department store in exchange for discounts on purchases.

They’ll point out that in addition to your score dropping immediately upon opening one of these cards (due to the hard pull on your credit), the low limit — typical of department store and other retail cards — combined with the new balance can raise your individual and total card credit utilization ratio. That’s the ratio of how much you have borrowed versus how much you could borrow. It counts for about 30 percent of your credit score, and the lower that ratio is, the better.

They also like to stress that store cards’ high interest rates will most likely wipe out any cost savings from the discounts.

While are valid arguments when applied in some situations, I would like to add a slightly different perspective, focusing on how department store cards can work to your advantage.

It’s true that opening a new department store card can lower your score, yet this is not unique to department store cards. Opening any new account can temporarily lower your credit score, as newly opened accounts of any kind indicate higher credit risk and make up about 10 percent of your score. But to single out department store cards for this reason can be misleading, since there is little difference in impact between a department store card, general credit card, mortgage, auto loan or any other type of credit line.

Whereas it’s easy to see how the benefits that go along with a mortgage or auto loan can far outweigh the short-term loss of a few points to your credit score, for someone watching every penny and not intending to buy a home or car in the near future, saving 10 percent on a $500 appliance can also be worth the temporary loss of a few points from a credit score.

Let’s take this example a step further. If, for example, the limit on the account used to buy that $500 appliance is only $600, high utilization and a further drop in score is likely to occur — but there’s a way to avoid that extra credit score hit. You could pay the balance before the statement due date. Paying early prevents the charges from impacting the credit score through high utilization and keeps the finance charges from wiping out that 10 percent savings.

In terms of not getting the respect they deserve, department store cards are rarely recognized for their positive contributions to credit scores. For instance, in the scoring calculations that consider payment history and length of credit history — together accounting for 50 percent of your score — department store cards can do as much for your score as any other form of credit.

To answer your initial question, I recommend leaving that department store card open for the simple reason that closing it will do nothing to help your score and, in some situations, could actually do damage.

High utilization not only results from charging a large amount on an account with a low limit and not paying immediately. Closing an unused card removes its credit line from the overall credit utilization calculations, which can result in higher overall utilization.

Although you don’t owe on your department store card, if you have high utilization on your other cards, closing the department store card could hurt your score.

The other way in which closing a card can hurt your score takes place in the future — typically about 10 years later — when the closed account is removed from your credit report and can no longer contribute to your score. Since the department store card will be one of your oldest accounts in 10 years, the loss of it from your credit report could cause your score to drop slightly.

The good thing about credit scoring continues to be that as long as you pay all of your bills on time each month, keep your card balances low and only open new accounts when needed, other actions, such as closing or leaving an account open, won’t have much impact.

I hope you find this information is helpful. Thanks for writing!

Have a question or comment?  Let’s hear it!

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