How to Prevent Holiday Shopping From Crushing Your Credit
It’s beginning to look a lot like Christmas but that’s no excuse to let your credit score suffer. We all tend to overspend on buying gifts for our friends and loved ones (and even splurging on ourselves just a bit too).
Before you realize it, all those purchases have started to add up and when you get a look at your monthly statement come January, the damage is likely done. There’s no way you can pay it all off by the due date and thus that slope towards a lower credit has just gotten more slippery.
But here’s some more sobering news, it’s not just about how much you spend on your credit cards either. There are other things you might be doing that can also be harmful to your credit score and racking up debt is only one way to strike a crushing blow to your score. If you are opening more cards in addition to the ones you already have, it will definitely affect your credit, and not in a good way either.
The factors that go into determining your credit score are varied and each one works towards raising or lowering it in complex ways. It’s very possible that you are doing serious damage to your score without even knowing it and that’s why we’ve put together this simple guide.
Once you’re better informed about all of the ways your holiday shopping can wreak havoc on your credit you can take steps to avoid getting yourself into serious trouble.
Watch Your Credit Card Balances
It’s no major revelation that getting into debt will hurt your score, but the way it can impact your score and why might be news to you.
Basically, the closer you are to your limit on your credit card the worse it can be for your credit.
When you are being scored, one third of the determining factors towards the number you receive relates to how much debt you are carrying. The way that is figured out is through something called utilization.
Utilization means how much of your available credit you are using on any one credit card. The general rule of thumb that no one has told you about (until now) is not to use more than 30% of your available credit. So to break that down in real numbers, if you have a $1,000 credit limit on your Visa you shouldn’t have a balance of more than $300.
Anything more than that means you are utilizing over 30% of your credit on that one account and if you have three credit cards, all of which are at 30% or more, you are way beyond the recommended utilization ratios.
If you pay off the balance (or balances) in full every month, without fail, then the utilization ratio won’t have as dramatic an impact on your score. However, it still does factor in when your score is determined.
No More New Inquiries
Every time you apply for a new credit card, that also has an impact on your credit. This typically plays a role in those instances where you walk into Target or Macy’s and they ask if you would like to open one of their credit cards and save 10% or 15% on your purchase right there at the register.
Sounds appealing at first but that 10% isn’t going to do anything more than cause you a headache later on when you check your score and find that it has gone down just because you wanted to save a few bucks at checkout.
Opening a new store card means they have to check your credit to see if you can be approved. That inquiry alone could have a negative impact, especially if you conduct a lot of them in a short period of time.
Let’s be honest, the credit card offers come at you pretty fast with attractive offers of 0% introductory APR’s and cash back rewards and bonuses for spending money. It may be very tempting to take up some of these offers but if your score isn’t high enough to be approved the only thing you are getting out of the deal is an assurance that you will continue to be denied as each inquiry chips away at your score, slowly but surely.
The bottom line is this: If you absolutely NEED another credit card, only then should you apply for it. Ignore all the fancy offers.
Multiple Credit Cards
It’s possible that you have more than one card in your wallet but you may rarely take it out to pay for anything. But that may not matter if you keep getting new cards.
Put aside the previous warning of too many inquiries for a second because the bigger threat to your score is actually qualifying for and opening those new credit cards. If you have too many of them within a small amount of time, you could be hurting your score.
It doesn’t even matter how quickly or not you’re paying off those monthly balances either, part of the determining criteria that goes into scoring your credit is the average age of your accounts. Someone with an older average age of something like seven accounts will likely receive a higher score than someone who has five accounts, all of which have been opened within two years of each other. If you apply for a bunch of them at the same time, that only makes the problem worse because you are demonstrating negative credit behavior.
So if you’re thinking about opening up some new credit cards within a few months of each other to do your holiday shopping, don’t. That’s only going to do you more harm than good.
Too Many Balances
We’ve talked about how applying for and opening up too many new cards and doing so in too short a period time can do a number on your score. But look beyond your cards and consider any other factors that can play a role in killing your credit. That means maintaining a balance on more than one account, be it a credit card, a personal loan, or any other possible way for you to carry some form of debt.
Too many accounts that have any balance whatsoever, we’re not even talking utilization ratios at this point, will do more harm than good to your score.
So be sure to pay down your balances and do all that you can to prevent them from climbing back up to the levels (or higher) they were at when you paid them down. Repeating the cycle of debt is only going to get you into more of it and that will crush your credit.
All of this isn’t to suggest that you shouldn’t apply for a new credit card and opening a new account near the holiday season can be a smart move. But you have to be smart about the card you decide to choose because you could be signing on for a whole lot more than you first bargain for when you sign on the dotted line.
We’ve mentioned the offers that come at you, with 0% APR for a year (or two in a few cases) and cash back rewards of up to 6% depending on what you buy. But that initial 0% can jump pretty high once the introductory period is over and if you are taking on an interest rate of around 18 or 20% that is a lot of money to pay for the privilege of swiping that card.
Be sure to look at the fees that come with using the card as well. Some of them have fees for transferring a balance to the new card from an existing card, spending money in foreign countries, and an annual fee that you will pay just to carry it.
Transferring a balance to your new card might be a good idea because you won’t be paying interest on that debt while you are paying it down, but the fees can add up if you’re not careful. So read all of the fine print before you apply.
Pay Down All Debt
There is no other way to say it but the quicker you pay down all of your balances and adopt consistent payment practices where you meet all of your financial obligations when they are due, the higher your credit score will get. Failing to do so will only continue to lower your score. Adopting responsible debt management will raise it.
How do you handle your Christmas spending? Let us know your tricks in the comments!
Originally published at getlenny.com on December 6, 2016.