You want to avoid hits so that when you apply for big loans such as a home or auto loan you have the best score possible, which will lower your borrowing costs significantly more than the relatively small savings you might get signing up for the retail credit card.
The FICO scoring model goes from a low of 300 to a high of 850. Lenders generally group borrowers within certain ranges. So for example, a lender might reserve its best rates for consumers with credit scores above 750.
Apply for a retail credit card and you might be kicked down a range. So, even a 5-point or 10-point drop could cost you hundreds if not thousands of dollars in interest payments on a big loan.
Signing up for that store card could ding you in a couple of ways.
Part of the factors that go into your credit score is applying for new debt. New credit accounts for about 10 percent of a consumer’s FICO score. You want to be sure you aren’t applying too often for new credit because you it might increase your risk profile.
Additionally, when you apply for the credit, the store will pull your credit report and that’s called a “hard inquiry.” This action could lower your score by as much as 5 points.
Your score could drop if you use the card and don’t pay the bill off before the next billing cycle. The amount of debt you owe determines 30 percent of your credit score. Use too much of your credit limit and that can decrease your score.
Let’s say that you’re approved for a credit line of $2,000 so you can buy that $1,500 television. You know it will take you several months to pay the bill off. You could end up dropping your credit score even further because now you are using 75 percent of your available balance on that card.
The credit-scoring algorithm looks at the utilization rate for each active individual account as well as your aggregate utilization. Let’s say you have three active credit cards, each with a credit limit of $5,000. Two cards have zero balances. The third card is maxed out at 100 percent utilization. Your overall utilization for all three cards is 33 percent.
You’ve probably read that you should keep your utilization rate to no more than 30 percent for each card and overall. But that’s a general target used to keep people from overusing credit. It’s not a hard and fast rule. FICO says there’s no specific bar over which your utilization will negatively affect your score. But analysis has shown that consumers with FICO scores over 800 use an average of just 7 percent of their available credit.
If you have a super high credit score with some room for a small dip, then sure you could apply for the retail credit card and not adversely affect your score long term. Looking at just the hard inquiry, you’ll likely see your score jump back up in a couple of months.
Have a game plan before you go shopping so that you aren’t tempted to sign up for new credit. First, know your credit score. And, think about what Dan Ariely and Jeff Kreisler write in “Dollars and Sense: How We Misthink Money and How to Spend Smarter.”
“Discounts are a potion for stupidity,” they write. “They simply dumb down our decision-making process."
Color of Money question of the week
What plans do you have to keep your holiday spending in check? Send your comments to email@example.com. Please include your name, city and state. Put “Black Friday” in the subject line. Please include your name, city and state.
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Who doesn’t want to be a 401 (k) millionaire?
Fidelity Investments recently reported that for the third quarter of 2018, the number of people with $1 million or more in the employer plans it manages jumped to 187,400 — 10 times the 19,300 millionaires it reported a decade ago.
As of Sept. 28 this year there were 34,128 TSP millionaires, up from the 16,475 millionaires reported as of August in 2017, according to the Federal Retirement Thrift Investment Board. By comparison, the average TSP balance at the end of September was $107,333.
Even accounting for the taxes that will eventually have to be paid there’s something impressive about people who started saving at the beginning of their working careers and now have a really nice retirement nest egg.
Last week I asked: If you’re a 401(k) or TSP millionaire what advice would you give to people who want to join your club?
Bruce F. of Bowie, Md., said he and his wife have more than $2 million total in their 401(k) tax deferred accounts.
Here’s his advice on how to join the millionaire club.
1. Start as soon as you get your first job. Opening a Roth IRA as soon as you get your first part time/summer job is even better. The power of compound interest is incredible if you save and invest from age 15 to 65.
2. Don't be afraid of being in the stock market. Even though there will be highs and lows, don't be deterred. Stay the course even when the pundits on TV rant and rave about the Dow, S&P and Nasdaq. Since you are investing for the long term (very long term actually), keep in mind that the economy will go through a few recessions, booms and busts. Just ride it out and resist the urge to sell during a down market.
3. Prudently manage your risks buy investing in low cost mutual funds.
4. Don't get sucked in to buying new furniture and new cars. My wife and I bought our first single family home in 1997. However we did not buy living room furniture until 2013. Having nice furniture in the living room looks good but we placed our priorities on saving for our retirement.
5. Make sure you and your spouse are on the same page financially. My wife and I are very comfortable with delayed gratification. (Like you always preach, we ask, “Is it a need or a want."). This keeps us true to our budget so we don't miss the money we allocate to investments each month.
6. Meet with a financial planner early in your career. They can help you set a long-range financial goal for your retirement. Setting a goal and checking your progress along the way, helps to keep you on track.
Nancy B. of Carrollton, Tex., wrote, “Some of your readers may be so intimidated by ‘Start early!’ ‘Put away the max!’ ‘Bank every raise!’ that they don’t start saving in a 401(k) at all. They need to hear my story. We couldn’t afford for me to join the new company 401(k) for three years. When I did start contributing at about age 30, I put in only 1 percent or 2 percent for a number of years. I was laid off once for 2 years when I couldn’t contribute. So I remember looking at a pretty paltry sum in my account in the early years. But the power of long term investing in the stock market did the trick, and when I retired early at age 58 to care for my elderly parents, I rolled over $635,000 into an IRA. So my advice is start contributing when you can and contribute what you can! It’s not too late or too little!” My $635,000 isn’t a million but it’s a lot. My husband is still working and he is a 403(b) millionaire, but much of that is due to his company’s incredible retirement plan. They contribute 10 percent of his salary outright, and then match dollar for dollar his contributions up to an additional 4 percent.”
Color of Money columns this week
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