'Do you want to open a free credit card with us today and get 10% off on today's purchase and 10% or more on the future purchases?'
Haven't you been asked that question at the point of sale (POS) of any retail store? The question keeps you wondering if you should say a 'Yes' or 'No'. A 'No' finishes the billing process faster with no losses, or at times, no impact to your credit history. A 'Yes' makes you sign up providing some mandatory information like your SSN, first and last name, and billing address. While checking out, you mostly see the text 'You Saved' highlighted and the amount and feel happy about your shopping. The retail store uses the provided information to extract your credit reports and check your credit history.
Have we ever pondered: How good is a free Credit Card? I was forced to think about this after missing a few mails which included my Retail Store Credit Card statement. I also read somewhere how defaulting to pay credit card bills affects credit history. Here is how it works.
Credit History is an indicator of a consumer's ability to repay debts based on the demonstrated responsibility in repaying past debts. A consumer's credit history consists of information such as: number and types of credit accounts, how long each account has been open, amounts owed, amount of available credit used, whether bills are paid on time, and number of recent credit inquiries. It also contains information regarding whether the consumer has any bankruptcies, liens, judgments or collections. This information is all contained on a consumer's credit report. Credit history is thus a critical factor used in credit rating and is used and referred by many lending institutions.
Your credit score is a number generated by a mathematical algorithm, a formula, based on information in the consumer's credit report, compared to information on tens of millions of other people. The resulting number is a highly accurate prediction of how likely the customers are to pay their bills.
The best-known and most widely used credit score model in the United States, the FICO (Fair Isaac Corporation) score is calculated statistically, with information from a consumer's credit files. The FICO score rates one's creditworthiness and rates credits on a scale from 300 to 850. Credit scores are used extensively, and if you've gotten a mortgage, a car loan, a credit card or auto insurance, the rate you received was directly related to your credit score. The higher the number, the better you look to lenders. In other words, people with the highest scores get loans at the lowest interest rates.
Fair Isaac reports that the American public's credit scores break out along these lines:
How FICO calculates scores
There are 5 key factors FICO uses to calculate credit score:
Below table maps the credit score range to its worthiness per FICO.
A trigger from any retailer/lender to check your credit score remains in the history for 7 years. So, according to FICO, closing old or unused credit cards rarely helps your FICO score.
Thus, the greater the number of new credit card applications, the lower would be the credit score.
Pros and Cons of Retail Store Credit Cards
Here are some guidelines that you can use to prevent unnecessary dinging of your FICO score:
Now, should one apply for a credit card?
Evaluate all the FICO credit score parameters, guidelines and your future plans for any loans or debts, and then decide on applying for a credit card.
Happy and Careful Shopping!!
References:
http://www.myfico.com
http://www.bankrate.com
http://www.bills.com
