I have never been a big mall person. For me, spending time in a retail store is somewhere between a trip to the dentist and slow torture with no end in sight – especially with the limited risk and lucrative earning potential of using credit cards online.
So I was blindsided when one of my readers mentioned how abysmal his credit score had gotten after a single credit card application. I can’t stress enough how strongly I reject the notion that multiple credit cards hurt one’s credit score. But there is one distinct exception: store branded credit lines, also known as "retail cards."
In my reader’s case, he was offered a steep discount while he was at the cash register checking out. Thinking that he would save a hundred bucks or so, he took it.
What happened next was frightening: his score dropped drastically, unable to be reversed for nearly two years and severely hindering his ability to receive top-tier credit card offers.
Why Retail Cards Hurt
Why did this happen? There are two reasons a retail card hurts your credit score, with one being far more painful.
The first is a hard inquiry. Every time you apply for a credit card, the bank (or store) will check your credit score to see if you are a trustworthy applicant. Constantly requesting credit lines is considered a bad thing, so the credit agencies ding you 2-3 points per hard inquiry in return for the “risky” behavior you exhibited.
The second reason is the distinction between good credit and bad credit – a distinction that can be far more harmful to your credit score. Credit agencies view debt differently, depending on how it is being used. And how a credit agency views your credit worthiness can mean everything in the world of earning miles.
Consider This Paradox…
Home mortgages are considered a phenomenal way to build credit, even though a person is potentially on the hook for hundreds of thousands of dollars – more than a retail credit card would ever be. Yet retail cards cause far more damage to your credit score. Why?
The reason for this is buying a home is a long-term investment for the future. A homeowner takes in a large amount of debt, but the idea is that he or she is using the debt in a meaningful way. Thus the credit agencies reward the person's credit score over time (assuming on-time payments are made).
Retail credit cards, however, are the exact opposite – here a person is using debt to fund a purchase with little long-term value. And if you think about it intuitively, it makes sense. Clothing stores are the primary issuers of retail cards – clothing being an asset that drops about 90% in value once used. That is not a good use of debt and should be penalized by credit agencies.
Retail Vs. Traditional Cards
It is important to note that retail cards are considered far worse than traditional credit cards. If the two were the same, TFG wouldn’t exist.
The main difference between the two is, again, how they are used. Unlike retail cards, traditional credit cards can be used for “positive” purchases like remodeling a home or the up front costs of starting a business. That debt can be good, while the vast majority of retail purchases are not "good" from a credit agency perspective.
Also a big difference is the source of the debt. While major banks have been lending money successfully for decades, retailers are relatively new to the game. An inquiry by a bank carries less negative consequence than an inquiry made by a store.
In full disclosure, this is a grey area of personal finance and I do not work for a credit agency. Which means my understanding is based on hundreds of hours of research, personal and reader experience – no more, no less.
But the above is the widespread consensus for why “bad credit” drops your score so much. Again, intuitively this makes sense: anything that is an investment helps your credit score, anything that is a liability doesn’t. Retail = liability; house = investment.
As always, I urge readers to reach out if you have any questions at all. I always recommend you be cautious before applying and sometimes that is as simple as asking. I say this as someone who thoroughly enjoys responding to readers – as well as someone who has applied to over a dozen cards a year and seen his credit score rise past 800.