Tuesday, December 06, 2005

Store Credit Cards Can Screw Up Your Credit Score

David Bach, author of the Automatic Millionaire wrote this essay on four reasons to say no to store credit cards. While most of them are the usual suspects when talking about avoiding credit cards in general, one point was rather significant, even for a disciplined spender who would definitely pay off all his/her balance every month.

One of the factors determining your credit score is how much of your available credit you have used, but this is not just in sum total. Let's say you have cards with banks A, B and C with a credit limit of $1,000 each. Your balance on card A is $800, card B and C are $200 each. Your total balance of $1,200 represents 40% of your available credit, so that won't trigger a red flag. However, you have used more than 50% with a single lender (80% from A in this instance) and so you will lose points in the evaluation of your credit score.

What that means is that a small purchase from your neighborhood Target with a store card could easily do some pretty nasty damage. All for a few free bucks ... that, my friend, is what called cutting an leg to save a toenail!

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