The holiday season is now over and for many comes the real downer of figuring out how much money they spent on credit cards and what they should do with the new retail credit cards they opened. While I express to people all of the time to avoid that situation sometimes that advice is ignored because the temptation of the instant discount off your current purchase at the register is just too much for some. Now that the dust is settled and you have this new card many are left thinking, “I will just close it right away and whatever damage I just did to my credit score will be fixed.” To add to that, there are several “experts” out there that will tell you having a retail credit card is bad for your FICO score and the faster you close those cards the better. What should you do? Let’s take a closer look at this scenario, but this time with accurate factual information.
First off, next year and moving forward if you are in doubt as to whether you should apply for the retail credit card or not, don’t! The reason they are giving you the immediate discount is because a lot of people will pay more in interest over time than the discount they are actually saving in the first place. These companies are not dumb. They understand the human spending habits as well as the fact that IF they can get a credit card in your pocket with their name on it, you are much more likely to buy things you can’t afford right now and then pay them extra interest over time on those purchases. Retail cards are infamous for their subprime-style terms with interest rates well into the 20’s and credit limits as low as a few hundred dollars. Using and carryinga retail card balance will quickly add to the balance and with such low credit limits, modest purchases can result in highly leveraged cards, which lowers your credit score as a result.
But since we can’t go back in time and reverse the application for the new retail credit card you agreed to, let me give you three possible solutions with what to do with the account now:
Close the card immediately
Many people will close the card right away because they only opened it for the discount. That’s fine but you should be aware that closing it doesn’t do away with any damage you’ve already caused to your credit by opening it. The credit inquiry that was posted by the issuer (or issuers) when you applied will still be there and they can lower your score for the next 12 months. And, the newly opened account (or accounts) will be on your credit report likely for the next decade.
Close the Card…Eventually
I believe that if you don’t close the card immediately you shouldn’t close it ever. The unused credit limit, although a small one, is likely helping your credit scores because credit scoring systems like unused credit limits. By closing the card you will lose the value of the card’s unused credit limit. You will, however, still get the benefit of the age of the account, open or closed. There’s a pretty common myth that when you close a credit card you lose the benefit of the account’s age, which is not true. Also retail credit cards don’t charge monthly or annual fees (although that can certainly change), so the cost to simply hold on to the card is $0.
Never Close the Card
If you never close the card, then you’ll always benefit from the card’s unused credit limit, assuming you don’t run up a large balance. You’ll also always benefit from the account’s age because the credit bureaus won’t remove the account from your credit report, which they’ll likely do after the account has been closed for 10 years. If you made the mistake and opened the new card don’t make it worse by making another poor choice. Keep the card open!