The Impact of In-Store Financing

John, one of my lenders told me that I have too many finance company accounts on my credit report and that it's hurting my credit score. I've never taken out a loan with a finance company and when I pulled my report I was shocked to see three of them. They were for in-store financing offers that I took advantage of. What gives? Nobody ever told me anything about finance companies.

Bray Hayden
St Louis, MO

Hi Bray – I've wanted to write about this for a very long time, so thanks for the email. First off, do you honestly think the retailer is going to overtly tell you that your new in-store account is going to be with XYZ Financial? Yeah, right.

I'm normally not in favor of using in-store financing because of the damage it can cause to your credit scores. Here's how it can hurt you...

1. Stagnant Debt – The first reason those "no payments until rapture" offers are bad for your credit is that you have a never-decreasing balance until some day in the future when you decide to start making payments. If that debt is hurting your scores it will likely do so for the entire time your account is in the deferred payment status, which in many cases is at least 2 years.
2. Do You Know Who Your New Lender Is? – You may not care, but you probably just opened an account with a finance company or with the financial arm of a major bank. This may not sound like a big deal but, as Bray found out, finance company accounts can lower your scores. It's not a major hit to your scores, but these days most of us need the highest scores possible.

If the salesperson at the retail store, who probably works on commission, had told you that you were opening an account with a finance company (if they even knew), would you still have opened the new account? Maybe; maybe not.

3. Welcome Your New Friend... the Credit Inquiry – I'm sure I don't need to talk about inquiries again (as we've addressed them in the past here). This is pretty commonly known but worth repeating: When you take advantage of in-store financing, you are actually applying for credit and opening a new account. And there's a chance that the new account and the new inquiry could lower your scores.

I'm not universally opposed to in-store financing, but I do think it's a little deceptive to NOT share the above issues before you decide whether or not to apply.

Here are your options...

1. Go For It – If you don't care about the potential damage to your scores then rock and roll, my friend, and enjoy your new flat panel television or bedroom furniture, which will likely be out of style by the time you start making your payments.
2. Charge It – If you have a credit card with a decent credit limit, it might not be a bad idea to charge it on that card. Just be aware that credit card balances that are too close to their limits can really sting your scores. If you choose this option and you don't plan on paying off the debt quickly, limit the damage by using the credit card with the highest credit limit and lowest pre-existing balance.
3. Cash or Check – If you have the ability to do so then it's not a bad idea to avoid the whole credit issue and just write a check for your major purchase. Of course, charging it on a rewards credit card and paying it off the next month isn't a bad idea either, if you have the ability to do this. You get the rewards, don't pay any finance charges and have a $0 balance in less than 60 days.

As always, if you have any questions, comments, or just want to give me a hard time about my advice, please feel free to drop me a line at AskJohn@credit.com. I really do read and respond to every one of the emails — shocking, I know!

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