Zero Percent Store Account Impacts Credit
Zero Percent Store Account Impacts Credit Score
If you accept a zero percent store account offer from a store for a large purchase it will immediately ramp up your credit utilization rate. Your credit utilization rate means the percentage of your available credit that you actually are using and owe compared to how much you could be using if you wanted to. If you have the potential for $1000.00 in charges and you have $500.00 owed you are at a 50 percent credit utilization rate. The less of your available credit that you are actually using the better the credit scoring system likes it. This credit utilization ratio category makes up a whopping 30% of your FICO score. Here’s how it works in the case of a zero percent store account.
How Zero Percent Store Account Hits Credit
The store opens a zero percent store account for the exact amount of the purchase. This means to the FICO computer that you are maxed out on that account. Thirty percent of your FICO score is based on your credit utilization ratio. You want to keep this category in the best shape you can by keeping that ratio as low as possible in the aggregate as well as on each individual account.
Consumers that have a FICO score above 760 have an average credit utilization ratio of just 7 %! On that one particular zero financing item you will be at a 100 % debt to available credit ratio to begin with. The ratio will improve gradually over time as you pay the balance down. On the plus side you may be helping your mix of credit by adding this account which is actually an installment loan if it calls for the same payment every month. It counts as revolving credit if you need pay only a minimum amount each month.
And this is Very Important…
To get the most benefit you need to make sure the store reports to all 3 major credit reporting agencies to get credit for your timely payments. Don’t be afraid to ask about the zero percent accounts credit reporting policy but the clerk may not really know. You can only be absolutely sure about this when you see the zero percent store account actually reporting.
Other Zero Percent Store Account considerations
When you are offered a discount of 10-20% on an item to open a zero percent store account you must consider what the limit on that account will be. You must distinguish between a store’s revolving credit account as opposed to installment financing of a large item such as a furniture set or home entertainment center. This larger purchase account will be counted by the credit reporting agencies as an installment account with no interest. In either case beware of the unsavory little trick of fine print in the contract that makes you responsible for interest all the way back to the beginning if you are late for a single payment.
If you have a thin or non existent credit file a zero percent store account can be a good way to get started on building a good credit record. Some stores may take a chance and offer credit to someone who has limited ways to get started with a credit file. You should be aware that credit scoring systems look upon a store zero percent account as an inferior form of credit. Also there is the fact that there is a new hard credit inquiry to at least one credit reporting agency. If you are accepted there will be a lowering of your average age of credit. The takeaway here is that store accounts often have a greater tendency to hurt your credit situation than to help it.
If you go into a zero percent store account go in with your eyes wide open.