One of the lesser-known credit facts is that using finance company accounts can hurt your credit scores. It’s not a huge “point killer” but it can still hurt, especially if you are trying to improve your credit scores and you need every point you can get.
Avoiding finance company credit should be very easy. All you have to do is not apply, right? I mean, if I see a building on the corner with a “Joe’s Finance Company” sign then I’m going to keep driving. Seems simple.
Ah, but it’s not. In fact, thousands of people are opening up new finance company accounts each day and they don’t even know they’re doing it. They’re doing it by taking advantage of “in-store credit” offers. The technical term for this is Indirect Lending. You are applying for credit at a store but a completely different company is extending the credit.
Indirect lending is most common in the automotive industry. When you ask a car dealer to help you find financing for a new or used car they shop your credit out to several of their lending partners. You may be at a Ford dealership but you’re actually applying for credit with several lenders, not necessarily just with Ford Credit.
In the case of in-store credit the biggest culprits are the big box electronics retailers and furniture showrooms. When you apply for their credit to take advantage of “same as cash” offers then you are actually applying for credit with a completely different company. And, in many cases that company is a finance company.
If your application is approved you’ll drive away with a new TV, a dining room table and a brand new finance company account. In about 30 days that account will show up on your credit reports and your credit scores could suffer because of it.
This is all completely legal and, in fact, you agreed to it when you signed the credit application. Most people don’t read the fine print but it most likely identifies the indirect lender by name.
So what can you do about it if you’ve been a victim? Well, there’s not much you can do about it. Even if you have an old finance company account that has been paid in full for years the mere fact that you have one (or more than one) can still hurt your scores.
The better question is, now that you know this, how can I avoid it? There’s good news. It’s actually very easy to avoid this from happening to you. Before you fill out any application read who the lender will be. If the lender has the words “Finance” or “Financial” in the name then don’t go any further.
And, just to be safe, even if it’s with a lender that doesn’t have the dreaded “F” word in the name, it’s still a
good idea to ask the credit manager “WHAT TYPE OF ACCOUNT WILL SHOW UP ON MY CREDIT REPORTS?” If he or she doesn’t know then don’t go any further. If they assure you that it will show up as a “bank” account then you’re probably going to be fine. But, just to be sure, get it in writing.
If it will show up as a “finance company” account then don’t go any further. It’s simply not worth it.