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Ask Creditnet: How In-Store Financing Can Hurt Your Credit Scores


Dear Creditnet: I'm currently in the market for a new TV and Best Buy is offering 0% financing for three years. My question is when you open an account like this, how big of a hit does your FICO score usually take and how long will it take to rebound? I could easily pay cash for the TV up front, but the "finance" person in me says it's free money—why not take the terms?

Answer: Hard inquiries for a new credit card will generally drop your FICO score about five points, but it should bounce back within a few months. In some cases, a hard inquiry may not even affect your FICO score at all, so I wouldn't worry too much about having an extra inquiry on your credit reports.

However, what you should worry about is how retail credit card deals (what Best Buy is actually offering you) can often wreak havoc on your credit utilization ratio, which accounts for about 30% of your FICO score.

Here's how it works. If they give you a $3,000 credit limit (places like Best Buy often don't offer very high limits) and then you immediately charge $2,500 for the new TV, you're already at an 83 percent credit utilization ratio on the card.  That will definitely have a negative impact on your score until you pay the balance down.

In fact, in order to keep your credit score at its best, you should never use more than 10-30 percent of your available credit on any individual card.  Likewise, you'll want to keep your overall credit utilization under 10 percent. So, if the finance guy in you still wants to get some free money, I think it might be a better idea to just go ahead and get a new 0% interest credit card (Citibank cards often offer some of the longest no interest periods) with no annual fee.

If you have good credit, you'll most likely get a much higher limit than you would from Best Buy, which will allow you to keep your credit utilization low while paying off the entire balance at no interest. If you're not keen on getting a new credit card, I would just make the purchase using the credit card you normally use, and then immediately pay it off in full with the cash you've saved. Stay away from Best Buy's in-store financing—it's not worth it.

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Joshua Heckathorn's picture

Joshua Heckathorn was President of Creditnet, is a credit expert and has been featured on CNNMoney, FOX Business, Yahoo Finance, The Street, and many other national publications during the past ten years.  He received a Bachelor of Science in Management (Finance) from Brigham Young University's Marriott School of Business and earned his MBA from Seattle University.

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