Lender of Last Resort

Dear Dr. Per Cap,

What about those credit card offers you get when you are at a department store? The ones that promise a discount on your purchase? Is there a trick to them? Someone told me they affect your credit score.


Dear Wondering,

“Apply today and get 10% off your purchase.” Sound familiar? Seems like every store you go into these days wants to sign you up for a credit card.

You might want to think twice though before taking advantage of what might appear as a convenient discount. An in-store application for credit can actually hurt your credit worse than if you apply for a credit card through the mail or online (see below), and here’s why: It looks like you’re desperate for money.

To the three credit bureaus – Equifax, Transunion and Experian – banks that offer in-store credit are considered lenders of last resort. Unlike a credit card you can apply for at your local bank or credit union, an in-store application sends the message that you don’t have enough money or pre-existing credit to make your purchase, so you’re relying on the store for help even if you already have plenty of available credit or cash in hand. This doesn’t seem completely fair, but that’s how the credit-reporting system works.

The solution: next time plan ahead before signing up for a new credit card just to save a few dollars at the checkout counter. You can keep an eye out for sales, check newspapers and magazines for coupons, or shop for discounts online. Bottom line: you probably don’t really need a new credit card anyway.

So just what goes into figuring your credit score?

35 % Payment History: Paying your bills on time as agreed is the most important factor making up your credit score.

30% Current Debt: Your existing debt is almost as important as your payment history. So try to keep a low balance-to-limit ratio on loans and credit cards.

15% Credit History: The longer your track record is for borrowing money, the better.

10% Types of Credit: Three separate lines of credit look best, both from loans and credit cards.

10% Credit Applications: Every time you apply for credit, it dings your score a few points, and stay clear of the in-store applications mentioned above that can really do a number on your score.

So remember, next time you are in line at the department store and they ask you to apply for a credit card, think long and hard about whether it is really worth it. A little savings today might have a big impact on your credit score tomorrow!

Ask Dr. Per Cap is a program funded by First Nations Development Institute with assistance from the FINRA Investor Education Foundation. This content does not constitute professional and/or financial advice, and Dr. Per Cap is not a licensed investment advisor. To send a question to Dr. Per Cap, email askdrpercap@firstnations.org.