The Day After Black Friday
December 09, 2011What is the day after Black Friday called? I have no idea if it actually has a name, but after reading news stories and seeing things all over the internet and on Twitter, I have a few suggestions. “Retail hangover Saturday?” “How much did I spend yesterday” day? “Look at all my new store credit cards” day? I saw a lot of stories, blogs and tweets about people spending money and opening up new credit cards in order to get an extra 10% or 20% off of their purchases. Many of them plan to close the cards immediately upon getting their first bill. But is that a wise move? It might be, but let’s look at the options you have for recently opened credit cards, and how your credit score might be impacted.
You can keep the card open forever. You can close it in a few years. Or, you can close it today. Let’s take a look at the good and bad of each option and how it may impact your credit score.
Keep the card open forever:
The good news here is that your overall credit limit (combining all of your open credit accounts) is higher by the amount of that card’s available credit. How this helps is that with more available credit, as long as you don’t carry a balance, your “utilization rate” is lower and that helps your credit score. What’s a utilization rate? It’s your overall outstanding balances divided by your overall credit limits. So if you have $10,000 in available credit and $2,000 in outstanding balances your utilization rate is 20%. As long as your utilization rate is 30% or lower, you won’t see any negative impact on your credit score. Why should you care about utilization rates? Because it accounts for roughly 30-35% of your credit score! It’s important to know what yours is and to work to get it below 30%. Eventually, 0% should be your target! What could go wrong? You continue to use the card, carry a balance, and drive your utilization rate higher and pay big interest charges over the life of the card. Usually, retail cards are some of the highest interest rate debt that you will ever have.
Close it after it’s paid off OR Close it in a few years:
You get all of the same benefits of keeping it open forever, and you assume all of the same risks. But, at some point you may look to get a mortgage or refinance your existing one and the lender may ask you to reduce your overall credit available. That’s when these cards are a good target. High interest rates, low credit limits, and the temptation to purchase something you don’t really need, but can quite easily put on the store card, are all good reasons to close these cards out after you’ve benefitted from the initial discount for opening the card. You can benefit now with extra discounts, no annual fees and then get the card paid off so that interest charges are nonexistent. Then, you can close it out with no significant impact on your credit score. And remember, every open account is one more target for an identity thief. Keeping your number of open accounts small, and manageable is a good practice to keep your identity theft risk at a minimum. Remember to order credit reports at least annually! If you use annualcreditreport.com, you can order 1 from each of the 3 bureaus on a revolving 4 month basis so you’re never more than 4 months away from reviewing your credit report, which is a great way to stay ahead of identity theft. Really, if you’re going to close your store card after it’s paid off, or close it in a few years, why not just close it out now?
Close it ASAP:
I know I’ve opened a few of these to get an extra 20% off on my purchases or to get 6 months “same as cash” on the purchase of a big screen TV. (And the high def picture REALLY makes a difference when watching football. Best…purchase…EVER!) I closed out my cards almost immediately in order to remove the temptation of using it again. I opened it for a specific purpose, that purpose was over, and so was the card’s usefulness in my life. From a credit score perspective, my credit score took a slight ding because of a credit inquiry, but was also boosted a bit by the increased credit line. So, on balance opening the new card was a very slight negative, but if I opened 7 of them at once it would have been a big negative. I’ll take a drop in my credit score of a few points to get 6 months of free financing on a major purchase, or to get a big discount on my Christmas shopping. But, I want to remove the temptation of using them over and over and eventually carrying balances on them. For me, closing most of them out immediately was the best choice. But, I have kept a few open for sentimental reasons (my first card was a department store card) or for strategic reasons (there is one store where I buy clothing and they send me great discount coupons as a cardholder). What I try to avoid is the middle ground strategy of leaving a card open with no real game plan. I try to have an exit strategy when I buy an investment and I carry that philosophy over to my credit score and my credit cards. I know what my goal is for a card before I open it, and if I don’t have a clear goal then I don’t open the card.
So, what’s the right answer for you? It depends on what your goals are. Remember that each time you open a new store card it creates a duel between the hard credit inquiry reducing your credit score (for 12-24 months) and the new line of credit helping your utilization rate (as long as your balance is low or zero!) Weigh the impact on your credit score vs. what you know about how you use credit cards and if you are putting yourself at risk of running the balances up, and keeping them up. Know yourself. Know your goals. And, the right answer will be obvious. For me, I’ll open a card up if there’s an outrageous discount and then when the first bill hits my mailbox, it reminds me to close the card out. Think of it this way, if the credit card companies and the retailers were LOSING money on these cards, they wouldn’t offer the discounts to open them. They’re making money on these cards. The question becomes “who are the people who are making them profitable?” I’m not going to let it be me!