Applying for a Store Credit Card:

We have all been in this situation at least once in our lives. You are shopping at your favorite clothing store, and the cashier offers an application for a store credit card. She tells you that you can save 20% off your total purchase today (even the clearance items), and you will earn points to get additional discounts next time. The offer is so hard to pass! You can buy 20% more things and still be within the original budget.

It is very easy to get caught up with at the moment. Any other time it would not matter. Sure, they will pull your credit report for the card approval, which will probably not affect your credit score as much as you think, right?

The Truth Behind a Simple Transaction

Why does it matter if I charge an extra $200 on this new card? Well, it doesn’t matter unless you are in the middle of getting a home loan. What might seem like a harmless act of consumerism might be the final straw that causes your lender to delay your mortgage approval or even deny your mortgage application.

You might be thinking right now that this is an overreaction. But is it? Let me explain why it is not.

Four Reasons Why Getting that Card Might Not be Worth It

More debt

When analyzing your application, a lender will review the debts you have on your credit report. They also check the debts you might not have on your credit reports, such as child support/ alimony or 401K loan repayments on your pay stub.

All these monthly debts get added to your projected housing payment and divided by your income. This calculation will result in what people in the industry call the Debt-to-Income ratio (DTI).

Your DTI can’t be more than 50% to qualify for most programs. Spending more than 50% of your monthly income on debt payments might lead to a rejected application.

Now back to our credit card.

If you get into new debt that your lender was unaware of upon first approval, this DTI calculation will change. Depending on your spending, that extra debt might be the one thing that tips your DTI over 50%. Just because it is a new card and you have not received it yet, doesn’t mean that the lender will not find out about it.

Remember, your lender will likely pull a credit refresh before closing to ensure you have not gotten any new debt.

More paperwork

New credit means more documentation. Since this is a new line of credit, your credit report will not have details on your card balance and expected minimum monthly payment. Your lender will need that info to update their debt-to-income calculation.

So, you will be asked to provide the documentation instead of doing all the paperwork. This can cause delays in your final approval being issued.

Change in credit score

Credit bureaus use a variety of factors to calculate your credit score. The computation will factor in how long you have held a tradeline (credit card, installment loan, etc.). The older the tradeline, the more it helps bring up your score.

Opening a new credit card account will typically affect your score adversely. If you keep good track of your credit score, you will notice that your score will go down when you open a new tradeline.

When applying for a mortgage, you should try not to do anything to take your score down. Remember that a better credit score gets you a better rate and faster approval.

Frustration

Getting a mortgage approval can be stressful, and it can seem like the lender is asking you to provide everything, including the kitchen sink. Changing your debts will result in you having to provide more information and paperwork. This can get frustrating for some people, especially if you have already provided a stack of documents.

Don’t Jump the Shark

Taking on that cashier’s offer might seem like a good idea at the moment. But its long-term effects could do more harm than good. Sure, you’ll get a sweet deal on your purchase, though the actual cost might be your new home.

If you have a pending home mortgage application, it’s best to wait for approval before doing anything that will affect your credit score. That way, you are treading on safe waters. Who knows, you could get a better deal on that store in a few months!

Proof reading credit: Jino Postigo