The 3 Types of Purchases That Can Seriously Hurt Your Credit Score
Now that we have a solid understanding of the factors that make up a credit score, we can explore the specific purchasing decisions that put it at risk. It is often not the item you buy, but how you finance it, that causes the problem. Here are three common scenarios that can have serious negative consequences.
Purchase Type 1: The “Save 15% Today” Store Credit Card
Let us return to our opening example: the tempting offer of an instant discount for opening a store credit card. This is one of the most common ways consumers inadvertently damage their credit. The question, “does applying for a store credit card hurt your score?” has a nuanced answer, but the potential for harm is real.
The Immediate Impact: A Hard Inquiry
The moment you say “yes,” the cashier will process your application. This triggers a hard inquiry on your credit report. As we discussed, a single hard inquiry typically only lowers your score by a few points and its impact fades over a few months. However, the problem compounds if you do this frequently at different stores. Multiple hard inquiries in a short period can signal risk to lenders.
The Longer-Term Impacts: Credit History and Utilization
The bigger risks lie in what happens after the card is opened.
- Lowering Your Average Age of Accounts: A new account immediately reduces the average age of your credit history. If you have a long, established credit history, the impact might be minimal. But for someone with a shorter history, this can have a more significant negative effect.
- Skyrocketing Your Utilization Ratio: Store credit cards often come with relatively low credit limits. Suppose you open a card with a $1,000 limit to buy a new $900 television. You saved 15% ($135), but you are now using 90% of that card’s available credit. This extremely high utilization ratio on the new card will be reported to the credit bureaus and can cause a sharp drop in your score.
A Practical Example:
Consider Eleanor, who is planning to apply for a mortgage in three months. She has a good credit score of 750. While shopping for furniture, she is offered 20% off her $2,500 purchase by opening a store card. She accepts, saving $500. The store gives her a card with a $3,000 limit. Her credit report now shows a new hard inquiry and a new account with over 80% utilization. These two factors cause her score to drop to 715. When she applies for her mortgage, this lower score results in a slightly higher interest rate. Over the 30-year term of her loan, that small difference could cost her thousands of dollars—far more than the $500 she initially saved.
The Bottom Line: Before accepting a store card offer, ask yourself if the immediate discount is worth the potential long-term credit impact, especially if you are planning to make a major credit application (like a mortgage or auto loan) within the next year.
Purchase Type 2: The Co-Signed Loan for a Friend or Family Member
Co-signing a loan for a child, grandchild, or friend can feel like a simple act of kindness. You are using your good credit to help someone you care about get a car, a student loan, or their first apartment. However, from a legal and financial perspective, you are not just a character reference—you are making a purchase of 100% of the risk associated with that debt.
When you co-sign, you are making a legally binding promise to the lender that you will repay the full amount of the loan if the primary borrower fails to do so. The loan does not just affect your credit if things go wrong; it affects your credit from the very first day.
How Co-Signing Impacts Your Credit:
- It Appears on Your Credit Report: The co-signed loan is listed on your credit report just as if it were your own. This full loan amount is factored into the “Amounts Owed” portion of your score.
- It Increases Your Debt-to-Income Ratio (DTI): Lenders look at your DTI—your total monthly debt payments divided by your gross monthly income—when you apply for new credit. The monthly payment for the co-signed loan is included in your DTI, which can make it much harder for you to get approved for your own mortgage or car loan.
- Their Mistakes Become Your Mistakes: This is the most dangerous part. If the primary borrower makes a payment even one day late, you may incur a late fee. If they are 30 or more days late, that late payment is reported on both of your credit reports, severely damaging your pristine payment history. If they default entirely, you will be on the hook for the entire balance, and it can lead to collections and legal judgments against you.
A Practical Example:
Robert, a retiree with an excellent 810 credit score, co-signs a $20,000 car loan for his grandson, Ben. For the first year, Ben makes every payment on time. Then, Ben loses his job and misses two consecutive payments. The lender reports the 30-day and 60-day late payments to the credit bureaus. Robert’s credit score plummets by over 100 points. He is shocked to find he is now considered a higher credit risk, all because of a loan he was not even using himself.
The Bottom Line: Co-signing is a major financial decision with significant legal implications. Never co-sign a loan unless you are fully prepared and financially able to make every single payment yourself without hardship. Your credit score is directly on the line.
Purchase Type 3: The “Buy Now, Pay Later” Plan That Reports to Credit Bureaus
“Buy Now, Pay Later” (BNPL) services have become incredibly popular for online and in-store purchases. These plans allow you to split the cost of a purchase into several smaller, interest-free installments. While they can be a useful budgeting tool, their impact on credit is evolving and can be surprisingly negative.
Initially, most BNPL plans did not report to the three major credit bureaus (Equifax, Experian, and TransUnion). This is changing rapidly. Many larger BNPL providers have started reporting payment histories, and the bureaus themselves have developed new ways to incorporate this data.
The Potential Harm of BNPL:
- Risk of Late Payments: The biggest danger is missing a payment. Because the payments are often smaller and more frequent than a typical credit card bill, it can be easy to lose track. If the BNPL provider reports to the credit bureaus, a single missed payment can be recorded as a delinquency, damaging your payment history just like a late credit card payment would.
- Perception of Financial Instability: Even if you make all your payments on time, some credit scoring models may view frequent use of BNPL loans negatively. Having numerous small, short-term loans opened in a brief period can be interpreted as a sign that you are struggling with cash flow and relying on financing for everyday purchases. This can make you appear riskier to a traditional lender, like a mortgage provider.
- Potential for Hard Inquiries: Some BNPL services that offer longer-term financing may perform a hard credit check when you apply, which can cause a small dip in your score.
A Practical Example:
Susan uses BNPL for several purchases over the holidays—a new coat, some electronics, and gifts. She has four different plans, each with payments due on different days. She overlooks an email reminder for one of the payments and pays it five days late. Unfortunately, that BNPL company reports payments that are even one day late. The following month, she applies for a travel rewards credit card to book a vacation and is denied due to a “recent delinquency” on her credit report. The small BNPL purchase ended up costing her the opportunity to get a valuable credit card.
The Bottom Line: Treat BNPL plans with the same seriousness as a credit card or traditional loan. Understand the provider’s reporting policy before you use the service and set up a reliable system to ensure you never miss a payment.
