It's those enticing phrases such as, "No interest and no payments for 6 months" or "Get 10% off your purchase when you open a store credit card", that always tempt our wallets. When these "deals" are put in front of us, it makes it seem like we will be getting the deal of the century. We are made to feel if we pass these deals up, we will regret it for the rest of our lives. As your source for important credit score details, I am here to inform you that these deals are not as wonderful as they first appear. In fact, I provide all of my truth seeking readers with 3 deals that are sure to destroy your credit score. You're welcome.
"No interest and no payments" may sound like beautiful music if you are about to engage in a pricey venture. However, let me spell out for you what this actually means. Of course it is a bonus that you don't have to pay for the whole thing up front and you save money on interest rates, but these deals can have serious damage on your credit utilization score. Your credit utilization score is essentially the total credit available divided by the total debt amount. Credit utilization makes up 30% of an individuals credit score so it is extremely important to say the least. So for that purchase with "no interest and no payments," the line of credit that is taken out is automatically at 100% utilization rate. Until this line of credit is paid off, the utilization rate will stay this way. Just so you know, a good credit score typically has between 10-30% credit utilization.
As we have talked about before, opening a store credit card (or even student credit cards
) is a good way for someone without credit to begin to build a credit score. However, if this need is not there, be careful about the store credit card lure of "saving 10% on your purchase with a new store credit card." First of all, when someone applies for a store credit card, an inquiry is made. This then has the potential to lower your credit score right away. Next, as we have learned in previous blogs, store credit cards have low credit limits and this in turn can increase an individual's credit utilization. Finally, as we all know, store credit cards are likely to carry very high interest rates. Since I have spoken about this before, you all know the consequences of high interest rates. Therefore, deal 2 has proved to be not so enticing either.
You miscalculated your bank account status this month and oops, you accidentally over-drafted. Thank goodness that your bank offers an overdraft reserve account! Not so much. Unfortunately, these overdraft reserve accounts are not as friendly as they appear. Although they do eliminate those stupid overdraft fees, they open a line of credit that must be paid back immediately. If this is not done, your credit score will be hit with a missed payment. This hit to your credit score is much like a missed payment on a credit card and making payments on time is the most heavily weighted factor of an individual's credit score.
Be smart, and don't become a victim of these "deals" that in the end will hurt more than help.