Are you accidentally lowering your Credit Score?

It's happened to all of us. You walk into the mall and your favorite store is offering an instant 20 percent off your purchases today if you open a credit card account. You think to yourself, "Why not open the account, take advantage of the savings, and then tear up the credit card when it arrives?" But be careful; once you open that credit account – even if you never use it – it's on your credit report as open credit. This means that it's available for you to use and run up debt, so the credit reporting agencies will downgrade your score for this accordingly.

Once you have the credit card, in order to close the account you'll have to cut up the card and return it to the issuing company with a letter requesting that the account be closed. Only then will it be closed on your credit report. It's also critical that you document that the account was closed at your request and that such wording appears in your credit file. If you don't and the account is simply shown as closed, other potential creditors will assume that you paid poorly and that the credit card company closed the account as a bad debt. Be sure to keep a copy of your letter in case the account shows up as still being open on future credit reports.

Your credit file is composed of many things: how timely you pay, how much debt you have, how old your credit history is, the types of credit that you have in use, as well as any new credit. New credit shown on your credit report can mean the new car you purchased or the account you just opened at the department store but never used. Even if you don't use the store's card, it will lower your credit score because it's viewed by those who evaluate your creditworthiness as an opportunity for you to increase your debt. Many people don't realize that the store credit cards they sign up for purely to get a discount can hurt when they apply for other substantial loans because the lenders will include the store card's credit limit in their overall debt-to-income calculations.

By the way, you should also take care when shopping for that new car. Of course, every car salesperson wants to make a deal and will ask for your Social Security number so that he or she can tell you just the kind of deal that they can get for you. The wise thing to do here would be to not give out any personal information until you're absolutely ready to buy. Once the salesperson has your Social Security number your credit can be run, and that in itself can lower your score. Even though new rules on credit inquiries have been passed that allow you to comparison-shop within a given period of time without it adversely affecting your score, it's still a good idea to limit the number of times your credit is checked to a minimum.

And as far as credit cards are concerned, experts agree that it's generally best to have between three and five major cards and eliminate the individual store credit cards altogether. After all, the vast majority of stores accept the major cards anyway.