How Signing Up For That Store Card Could Hurt Your Credit Score

When you're tempted to accept a store card offer, think of two things: how you plan to use the card in the future and how opening the account will affect your credit score.

Financial Educator and Author Tiffany "The Budgetnista" Aliche suggests that people may misunderstand the risk associated with store cards because they don't understand how credit scores are calculated. Because of the relatively low limits of store cards, credit utilization (the amount of credit in use relative to your credit limit) is high. A higher percentage of credit utilization suggests higher risk to lenders, resulting in a lower credit score.

"People don't know that your maximum really is about 30 percent... anything above that is actually bringing down your score," says Aliche. A $200 balance on a card with a $1,000 credit limit won't affect your score much, but a $200 balance on a card with a $400 limit will.

In addition, applying for a new card results in a pull on your credit report to check your creditworthiness. A single pull only creates a temporary dip in your score, but too many pulls give lenders the impression that you are looking for a large increase in credit and therefore you represent higher risk. Your credit score will drop further.

A new store card can also drop your score by lowering the average age of your credit accounts. Excessive applications suggest that you are trying to increase your credit limit, but a surge in newly approved cards shows lenders that you have actually done it. The same risk principle applies in both cases.

When you are first establishing credit, the average age isn't relevant – but if you have had one or two cards for a long time and suddenly start introducing more cards, the average age falls dramatically, and your credit score takes a larger hit.

Store cards have risks, but they also have advantages. For example, if you have a poor credit history or none at all, a store card can be a useful way to build credit.

Pick one or two cards at most, make relatively small purchases on those cards, and pay those purchases off on time and in full. You'll gain a positive credit history that allows you to apply for a more widely accepted card with better interest rates.

Visa Director of Digital Products and former NerdWallet Credit and Banking Expert Sean McQuay sees a place for store cards in your wallet. "I recommend consumers carry at least three cards in their wallet... you have a card that optimizes for your favorite type of store... a card that optimizes for your favorite store... and the third card I recommend is one that makes a lot of money on everything else."

It's fine to balance a specific store card, a card that offers the best rewards on a type of spending like travel, and a card with a low rate for general purposes, but discipline is required and eventually, too many cards will increase the risk of lower scores.

Credit cards can be an effective way to manage money, improve credit, earn points, and travel with perks if used the right way. Benzinga's personal finance staff provides tips on using credit cards effectively.

Related Links:

How A Low Credit Score Can Raise Your Insurance Premiums

2-In-5 American Cardholders Have Fallen Victim To Credit Card Scams