I fought my mom tooth and nail when I went to college and she insisted (i.e. demanded) that I get a credit card for emergencies. I didn’t want the hassle of monthly payments and interest rates, and it wasn’t until a money-savvy friend of mine explained to me why credit cards are a good thing when not abused. And so I find myself in possession of several store-specific credit cards.
Having more cards/loans/etc. can impact your credit score positively as long as you pay at least the minimum payment each month. Even if you aren’t paying them off in full each month, being able to make timely payments on multiple accounts shows creditors that you are responsible with your money and don’t bite off more than you can chew. Even one late payment won’t hurt your score too much. I highly suggest going to Credit Karma to monitor your score. They have some brilliant tools for seeing how different changes to your habits and accounts can affect your score. I’ve been using the site for years and it has never let me down.
And those store cards sure are tempting! Signing up, they offer so many perks, like discounts or no fees for a year. I just got a Macy’s card, even though I rarely shop there, because I did have to make a big purchase and their discount was pretty significant. I had to ponder it, and I asked the cashier a few questions before deciding to apply, but I got my discount and now have another card that, though I will use very little, will help improve my credit score.
Before you go signing up for every card you can get your hands on, or before you brush my advice off out of fear (because credit is scary, I won’t deny that!), keep these things in mind:
1) Know if you will EVER get charged a monthly or annual fee for your card. Some will let you off the hook for the first few months or year, but ask what happens after that. If it’s a fee you can afford and are willing to pay, move on to step two. If not, end of story, the card is a bad idea. See step 4 for more reasons why it’s a terrible idea to get a card with fees you don’t want.
2) Ask about interest rates and when/if they get raised. Card companies can be sneaky and raise your interest rate to an absurd number, so the most important thing is to know your own spending and payback habits. Be honest: do you buy a lot of things you don’t necessarily need? Do you pay back your cards in full every month? If you don’t pay back your major cards in full, will you be able to pay off THIS one every month, or every other month? Remember: creditors don’t like when you bit off more than you can chew (and your bank account won’t like it either). If spending or paying back might get out of control, you should probably say no. If you are confident in your money-handling abilities, on to step three!
3) Have you applied for other cards/loans/etc. recently? How about in the past few years? Every time you apply for something casually like this, you will get a “soft hit” on your credit score. This just means that it will show in your credit report that you authorized someone to look into your score. A “hard hit” is when someone really goes and digs through your score (think car loans). You do NOT want to have many hard hits accumulated over a few years (though older hits will disappear after a while), and even having too many soft hits can be a bad thing. Check out Credit Karma or another credit-monitoring site to see how many hits you have (Credit Karma even tells you how good or bad your number is). If you think your number of hits is getting a bit high, it is a good idea to put off the card until some of the hits disappear from your score. If you’re good to go, though, there is one more thing to understand.
4) Don’t ever sign up for a credit card for a discount with the intention (or possibility, if you know you will get fees you can’t pay) of cancelling it. The time each account is open is a big factor in your credit score: having a card open for a long time shows long-term responsibility. Cancelling a card after a year or two shows you aren’t necessarily planning ahead. Now, it’s possible that you did plan ahead, but a crisis such as losing your job occurred, in which case you are probably safer cancelling the card than accruing more debt (remember those pesky interest rates?).
You don’t need to use a card daily, or even every month, for it to positively affect your credit score, but keeping it active is important. Yes, the discounts you can get up front are pretty sweet (I saved almost $60 on my Macy’s purchase–awesome!), but credit is a long-term commitment, so instead of thinking about the short-term perks, think about how a new card may improve your score in the long run. A new card is not always worth the $60 savings if it means down the road you may end up in a hole you can’t dig yourself out of. Be aware of the different effects a new card can have, and you can start being more credit-savvy!