1 year, 8 months ago
via credit-qna.com
What effect do merchant credit cards have on your credit score?
Merchant credit cards usually have a low limit, sometimes only $300-$500. Do these credit cards count as much as major cards like Discover or Visa towards your credit rating? If you pay off your merchant cards every month, does that have a positive impact on your credit?
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M$2 Answers
This is a good question and one that I haven't thought much of. But you bring up a good point, since the merchant credit cards have such a low limit, how much would that really affect a credit score?
Types of credit accounts for 10% of the score. Payment history accounts for 30% of the score. The merchant card would be under the 10% as a type of credit and paying it off on time would be part of the 30%. But since the limit is so low and you don't have a lot of balance, it probably wouldn't affect the score as much as a larger balanced card, especially if you keep a higher balance on it. Credit score is based on the amount of average balance one keeps on an account. So paying off the card is great but it's equally or more important to put more money on higher balance card. For instance, say you have a card with $300 balance on it and another with $5,000. The one with the $5,000 has $100 in finance charges, whereas the $300 has for the sake of argument, $10. If you put the $310 to pay off the merchant card and put the $100 minimum to cover the finance charge on the other card then you have a total balance of $5000 for both cards combined. If you put $310 on the $5,000 card, you are getting the interest paid pluse some off of the balance. You put the other $100 on the merchant card. Althought that balance isn't paid, since the finance charge is lower, you will actually have a total balance between the two cards lower than paying the other method.
So if you want to keep a lower balance, which is one factor with credit score, the merchant card isn't as important to pay off right away compared to the higher rate, higher balance card.
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Types of credit accounts for 10% of the score. Payment history accounts for 30% of the score. The merchant card would be under the 10% as a type of credit and paying it off on time would be part of the 30%. But since the limit is so low and you don't have a lot of balance, it probably wouldn't affect the score as much as a larger balanced card, especially if you keep a higher balance on it. Credit score is based on the amount of average balance one keeps on an account. So paying off the card is great but it's equally or more important to put more money on higher balance card. For instance, say you have a card with $300 balance on it and another with $5,000. The one with the $5,000 has $100 in finance charges, whereas the $300 has for the sake of argument, $10. If you put the $310 to pay off the merchant card and put the $100 minimum to cover the finance charge on the other card then you have a total balance of $5000 for both cards combined. If you put $310 on the $5,000 card, you are getting the interest paid pluse some off of the balance. You put the other $100 on the merchant card. Althought that balance isn't paid, since the finance charge is lower, you will actually have a total balance between the two cards lower than paying the other method.
So if you want to keep a lower balance, which is one factor with credit score, the merchant card isn't as important to pay off right away compared to the higher rate, higher balance card.
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M$Report Abuse
Merchant cards are one way of enticing clients to shop often at their store by dangling special rebates on your shopping spree once you enroll and bundled with points program and similar offers. Even though this cards have a lower limit compared to Visa or Mastercard, unfortunately the rate will eventually spike up to at least 20% from an offer rate of just 10 %, thus if there is rollover of your credit card debt, then you will be charged with a much higher finance charges.
With regards to your credit score, having a merchant card have a tendency to reduce your score in the sense that in arriving at your credit score, two factors are being considered which is the credit card balance and your credit line. If you are unable to pay off your card every month, then there is a possibility of breaching your credit line and in turn will reflect on your score.
But since you stated that you will pay it off monthly, if this is the case, your credit score will increase.
With regards to your credit score, having a merchant card have a tendency to reduce your score in the sense that in arriving at your credit score, two factors are being considered which is the credit card balance and your credit line. If you are unable to pay off your card every month, then there is a possibility of breaching your credit line and in turn will reflect on your score.
But since you stated that you will pay it off monthly, if this is the case, your credit score will increase.
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M$
