Friday, February 23, 2007

The Larry Rule - Is Applying for Store Credit Cards Bad for Your Credit?

Larry Lindsey is probably not a name that you know, but he is an important figure in the history of personal finance. Currently, Mr. Lindsey is President Bush's chief domestic economic advisor. Prior to that, he was a Federal Reserve Board Governor. But neither of these distinctions are what make Larry Lindsey significant. Instead, it was a little incident at Toys 'R Us that gave birth to "The Larry Rule."

The Larry Rule - What No Retail Clerk Will Ever Tell You

In 1996, Larry Lindsey was a Federal Reserve Board Governor. While it isn't known for sure, it's probably safe to assume that Mr. Lindsey was then, and is now, a millionaire. An even safer assumption is that he always paid his bills on time and should have had a top-notch credit score. After all, he was a member of the most prestigious financial committee in the world, and his personal credit history was undoubtedly vetted by politicians and regulators before he could be appointed to the Fed.

Despite all of this, Mr. Lindsey was denied a store credit card - at Toys 'R Us of all places. The reason? He lacked a sufficient credit score due to too many recent inquiries. You see, Larry Lindsey had been trying to prove a point. Whenever a retail clerk offered him an opportunity to apply for credit, he did so. He filled out the application correctly, even stating that he was a Fed Board Governor under "employment." He listed his six-figure income and all other pertinent data, and until Toys 'R Us came along, he had always been approved.

It wasn't that Mr. Lindsey actually wanted or needed all of these retail credit cards. His objective was to point out this flaw in the credit scoring system - applying for too many retail charge accounts can hurt your credit and prevent you from qualifying for real credit cards. Ask yourself, which is more important - the charge card at JCPenny that can only be used at JC Penny, or a real Visa or Mastercard that can be used at JCPenny and everywhere else, too?

To Apply or Not to Apply - That is the Question

On one level, the Larry Rule makes at least a little sense. After all, someone who is out there applying for credit all over town would seem to be in some form of financial distress. When the credit bureaus created their scoring criteria years ago, they didn't factor in pushy retail clerks who get bonuses for getting people to apply for cards they don't need. You do need a real credit card. Having two or three isn't a bad idea. But department store cards count as lines of credit on your credit report, and having too many of them can make you look like an unworthy applicant in the eyes of real credit card companies.

Armed with the knowledge that applying for and receiving retail store credit can be harmful to your credit, you should think twice before applying. First, ask yourself if you really want the store credit card, or are you just filling out the application so that the clerk will stop bugging you? If the store offers you a discount for applying, ask yourself if the money you'll save is worth the negative impact that the inquiry (or even being accepted) could have on your credit score.

If you actually do want the card or the discount is a real money-saver, then ask yourself this question: Will I need to apply for credit for something important, like a real credit card, a car, or a home loan, in the near future? If the answer is yes, then it is probably best to "just say no" to the retail application. You wouldn't want an inquiry from Toys 'R Us to inhibit your financial future.

We highly recommend that you research your credit card options before applying for a card. Then, choose the best one that is best for you, not one placed in front of you by a store clerk. In fact, you can search hundreds of cards right now at:

We recommend you browse this directory and pick our one or two solid cards that you plan on keeping for the long term. With this sound financial advice, you will be on track for a great credit future.


Mike "The eCreditCoach"

P.S. Don't wait, now's the time to get the card you need for the future:

1 comment:

Credit Expert said...

I started out with department store cards, but as soon as I graduated up to a major issuer, I never looked back.