Jim's Daily Blog

Store Credit Cards : The Hidden Cost Of "Instant Savings"

'Tis the season to do shopping -- and get bombarded with offers to open credit cards.

The deals are tempting, too. "Open a charge card today" and save up to 20% on your purchase. Considering that the average Black Friday ticket was $343, that's $68 saved per store.

For big-ticket items like televisions, the savings are even bigger.

But for people in the market for a new home -- or looking to refinance -- taking advantage of in-store savings could be a long-term money loser.

Every time you apply for a credit card, your credit score drops.

According to myFICO.com, "new credit" accounts for 85 out of 850 possible credit scoring points.  New credit is defined by such traits as:

• Number of recently opened accounts
• Number of recent credit inquiries
• Time since credit inquiry(s)
• Proportion of accounts that are recently opened to all open accounts

Shoppers with few open credit cards are more likely to see their scores drop that shoppers with many cards. 

Regardless, a credit score is worth protecting because of how mortgage rates are made.  A conventional mortgage applicant with 20% equity whose FICO is 720-739 will be subject to a 0.125% loan fee that a comparable applicant at 740 would not have to pay.

• For 700-719, the cost increases to 0.750%
• For 680-699, the cost increases to 1.500%
• For 660-679, the cost increases to 2.500%

Having a low credit score can be expensive.

It is okay to take advantage of in-store savings during the holiday shopping season, but it's also important to be aware of how your credit score may be affected.  

If you're not applying for a mortgage in the next six months, you'll likely be alright.  But, on the other hand, if you know you'll need your FICO soon, consider whether saving 15 percent on a $343 ticket is worth the long-term cost of a higher mortgage rate.