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Most of us have at one
time or another shopped in a department store, or other retailer, and been
offered "Instant Credit." Instant
Credit is when the cashier offers to give you a discount on your purchase in
exchange for applying for a credit card with that particular establishment
right there at checkout. The discount
usually varies from 5 to 10 percent of the purchase. You don't have time to really think about
what you’re doing or the possible consequences. It's a tactic used by many retailers to get
more and more consumers to carry their credit card. Statistics show that if you have the card,
you are very likely to use it later to make more purchases. Many people
accept the "Instant Credit" offer, take the 5 or 10 percent
discount, and never give it another thought.
Here's the problem. By applying for the Instant Credit, you
allow the retailer to pull your credit report. This action alone lowers your credit score
an average of 2 or 3 points. In addition,
the credit scoring system then punishes you in several additional ways. Firstly, having a new account on the report lowers
your score a little bit more. Secondly,
by the account being new, it has no payment history. This lowers your score even more. Thirdly, most retailers only give you a very
small credit limit, many times only a few hundred dollars. If your purchase is only a few hundred
dollars, this results in the account having a high balance to credit limit
ratio, which again lowers your score. If
the charges you put on the account result in the balance-to-limit ratio being
over 50%, your score drops dramatically, sometimes as much as 25 to 50
points.
By opening a very small Instant Credit account your
score has now been lowered enough to be turned down for credit in the future.
Imagine, doing this 2 or 3 times over
a 30 day period (the Christmas season, for example). I have seen consumers lower their credit
score approximately 50 to 75 points by falling for this retailer tactic.
Please do not accept "Instant
Credit" from anyone. The 5 or 10 percent discount on the purchase is not
worth the damage done to your credit score. Recovery from this can take a
year or more. If that is the year you
are trying to buy a house, the few dollars you saved on the discount will
pale in comparison to the thousands it will cost you in higher interest on
the long term mortgage.
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