Consumers trying to get creative with their finances should think twice about taking up a marketing offer for a no interest or deferred payment credit card. On paper, these cards look like a great way to finance luxury purchases at a minimal expense but the exchange for the payment flexibility can be a lowered credit score.
The negative impact is caused as follows. The limit placed on promotional rate credit cards tend to be very close to the amount actually being charged. An individual’s credit score is calculated by a formula heavily weighted by a credit utilization ratio. This ratio is determined by the portion of total available credit on all credit cards to the amount of credit actually being used at any given time. Experts advise maintaining a ratio range of 10% to 30% for a healthy credit score.
Gerry M., a California resident just recently opened a store credit card to finance the purchase of $3000 worth of home appliances as the 0.0% for six months financing offer made the overall costs easier to manage. He received a total credit limit of $5000 on the card and after the purchase he had a 60% credit utilization ratio for that card that got averaged into is total credit history. Despite paying off his bills in a timely manner, his most recent credit report showed a drop of nearly 10 points.
To avoid the negative affects of signing up for enticing credit card offers consumers need to fully read the fine print. All the credit card terms are different and the type of credit (either revolving like a credit card or installment like a car loan) can affect one’s credit score as well.