Be Wary of Getting More Credit When Student Loan Comes Due

Dear Credit Care,

I just applied for a department store credit card and received an approval of $500. I am barely starting my credit. I do have a school loan worth $14,000 coming up, and I wanted to know if it would be a good idea to cancel my department store credit card when I receive it? If so, how bad would this affect my credit score? I forgot to mention I do own a bank-issued credit card and am paying on time as we speak.

-Yesenia

Dear Yesenia,

I'm glad you wrote. Your credit history can affect much more than your ability to obtain future credit; it can also affect whether you are approved for a lease, hired by a new employer or receive a promotion at work. So, it is important to keep your credit in the best shape it can be at each period of your life. You are just starting to build a credit history and you will want to avoid as many mistakes as you can along the way. Life does happen and may contribute to some bumps in your credit history, but you can do your best to keep any credit damage to a minimum.

The answer to your question of whether to cancel your department store credit card depends on a couple of things. First, how do you plan to use the card? If you have the discipline to use the card only for purchases that you can pay off when the statement arrives, it may make sense to keep it. However, if you believe it is more likely you will end up charging to your $500 limit and carrying a balance from month to month, then it may be better to cancel the card. Department store cards typically have high interest rates, so carrying a balance on one can get expensive quickly.

Second, does the card fit in with your overall financial goals/plan? Many people obtain department store cards at the point of purchase to receive a percentage off of the purchase or to obtain some other incentive. What many fail to realize is the potential impact the card could have on their credit histories. For example, the available credit on the card may push your utilization rate above a comfortable level for other potential creditors. Opening a credit card account should be planned to ensure it fits with your spending habits and your financial situation, not as an impulse when shopping.

With $14,000 in student loan debt, I would encourage you to consider one more important thing when debating whether to obtain additional credit: your current income, or what you project your income will be once you have finished school and begin working. You will want to keep your nonhousing debt to less than 10% of your gross income if possible. If you are able to do so, it will be much simpler to qualify for a home mortgage when you are ready to buy a house. I realize that purchasing a home may be well into your future, but keeping your debt-to-income ratio in line will also keep you from ending up with a debt burden that could cause you financial problems and damage your credit.

Handle your credit with care!