How Opening a new charge card before or during applying for a mortgage loan can hurt you. Letâ€™s say you are in the market to purchase a home sometime soon. You currently have two credit cards MC and Visa for 10 years and 8 years, respectively. You have good history of payments with large credit lines of $5,000 and $10,000. Your current balances on these two credit cards are $1,000 and $2,900 respectively. You had no inquiries for opening a new card in last two years or so. We have the following table that summaries the information showing everything is within the guidelines and are OK.
Curre nt Balan ce
Amoun t Owed/ Credit Line %
20% OK 29% OK 26%OK
Impact Credit Score Length Inquirie Histor s y Since Years Last Year 10 OK 0 OK
No. of Card s 1
Now you are in a store looking at a beautiful couch that you fall in love. It is on sale for $1,500 but if you open a store charge card you could get additional 20% off, bring it down to $1,200. You cannot resist and open the new charge card to purchase the couch. You will be given a credit line of $1,500 with interest rate of 18%. Your Balance or purchase with Tax is $1,300.
As by new
Card#1 Card#2 New Card Total or Avg.
$5,000 $10,000 $1,500
$1,000 $2,900 $1,300
Impact on Credit Score Amount Length Inquiries Owed/ History Since Credit Line Years Last % Year 20% OK 29% OK 86.7% Not OK 31.5% Not OK
10 OK 8 OK 0 Not OK 6 Reduce d
No. of card s
0 OK 0 OK 1 ?
1 1 1
Table 1: Impact of getting a credit card credit score
you see just opening a charge card, a couple of areas go outside of the acceptable boundaries, as shown with red and yellow colors, which have negative impacts on credit score. This could cause higher interest rate, which in turn will cost a lot more for the purchaser at the end. Conclusion: Again, if you are buying a home sometime soon, don’t be tempted to open a store charge card to receive discounts. Though, these discounts can be huge, sometimes up to 25% of your purchases on the first day, however, this new card could cause your credit score goes down for the following reasons: • • •
The Ratio of (Amount Owned) / (Credit Line) for the new card as well as total accounts goes up. Average Length of your Accounts history goes down Number of Inquiries in the last year or so goes up
Number of Credit Cards on hand goes up