Credit Card
Personal Debt Issues

New plastic doesn't have to melt down your credit score

by Broderick Perkins

(7/11/2011) - Facing losses due to regulatory crack downs and frugal consumers paying off and cutting up cards, credit card issuers are once again filling your mail box with new offers.

The deals can be sweet, loaded with come-ons that include cash, points, air miles and low- and no-rate balance transfers.

Beware.

Consumer Reports says before you reach for that bounty of credit card offers, consider the ramifications.

First, while your credit score won't get dinged when you complete applications for several college loans, auto loans or mortgages, it can take a hit when you get a new card and/or complete applications for new credit cards.

That's especially true if your have only one other account on your credit report.

"The length of your average credit history will be halved and your score will probably drop," Consumer Report warns.

When you complete an application for a new credit card it shows up on your credit report as an inquiry. Inquiries remain on your credit report for 24 months and could mash your credit score for a year.

The longer your credit history, the safer your score is when inquiries are posted to your credit report, Consumer Report says.

Compare rates and offers. Then apply for just one at a time, Consumer Reports advises.

How many cards?

Having many credit cards isn't necessarily a score shrinker, as long as you understand the balance-to-credit limit ratio rule of thumb.

You don't want to charge each or many cards up to the hilt of your limit. The more credit you have available, relative to the amount you charge each month, the higher your credit score, generally speaking.

Many cards can actually insulate you from a credit score plunge, if you've got a good ratio. For example, if you must suddenly relocate for a new job and the move causes unexpected expenditures, your overall ratio won't suffer as much with many cards than it would if you had only one or two cards.

Of course, if you have credit cards with very high credit limits, say $20,000 or more, you don't need as many cards to keep your balance-to-credit limit ratio at a level that won't impact your score.

Certainly, if you spend up to your credit limit, your score will get slapped. How hard can depend upon where your score is when you hit the ceiling.

Consumer Reports said in a study of two borrowers, one with a FICO score (FICO scores range from 300 to 850) of 780 and another with a score of 680, the impact of maxing out one credit card took on different dimensions.

After melting down one credit card, the 780 score dropped to between 735 and 755 and the 680 score slipped to 650 and 670.

Why punish the higher score holder harder?

Lower scores already reflect riskier past behavior.

Which card to keep?

Closing one card shouldn't hurt your score if it does not represent a large portion of your available credit. If it does, think twice before closing it.

Also, closed accounts can remain on your file for 10 years and are factored into your score for that time, but the length of your credit history only makes up about 15 percent of your score.

All things considered, the best reason to switch cards is for a better interest rate. Consumer Reports says if your current card is higher than the average 15 percent rate, consider switching.

Zero-interest rate rate offers can be a good deal if you qualify with a score of 750 or better, need to pay off a lot of high-interest credit card debt and you are able to pay off the balance before the rate rises after the introductory period.

Expect transfer fees that can amount to as much as 4 percent of each balance you transfer.

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Site to See: Federal Reserve's 'Credit Reports and Credit Scores'