’Tis the season to shop, share and celebrate – and if you plan to fund the festivities with credit cards, you are in good company. Many households take on extra debt during the holiday season. However, there are pitfalls to pulling out the plastic that you might not be aware of. Certain credit activities that may seem harmless, such as opening a flurry of new retail or credit cards for the holiday season, can have a snowball effect that could bury your credit scores.
Be aware of these common credit card pitfalls to help prevent your scores from dropping:
- Applying for retail or credit cards leaves a mark on your credit reports. Each time you apply for a new card (even if you’re not approved or you don’t use it), a credit inquiry hits your credit report. The more you apply – especially over a short period like the holiday season – the more you are likely to be considered a credit risk. Too many inquiries will have a negative impact on your scores.
- Opening multiple new credit card accounts can have unintended consequences. It’s a good rule of thumb to refrain from opening a lot of new credit card accounts too rapidly because those accounts will lower your average account age, which will have an additional impact on your scores. And at some point, it may also signal to creditors that you are stretched thin financially and are “credit shopping.”
- Spending on those newly opened credit card accounts impacts your scores. If you use all the new available credit you opened for holiday shopping and don’t pay it off immediately, your scores will likely pay the price. Opening new accounts will increase the total credit available to you, but using most of that credit will likely increase your overall credit utilization, which has a negative impact on your scores.
Being smart about how you spend and repay that debt over the holidays can help protect your credit scores.
Take these steps to help your scores and wallet avoid the holiday blues:
- Make a spending plan. What’s your overall shopping budget? How much are you going to spend in cash – and how much do you plan to charge? Going off-list and over-budget affects much more than your monthly cash flow.
- Make a repayment plan. The more credit you use and the longer you take to pay it off, the more your credit scores may suffer. Be mindful about how much you’re charging, and be realistic about how long you will carry that debt.
- Resist the temptation to go “off-plan.” If you get hit with a new retail card or credit card offer that seems too good to refuse – STOP and take a breath, don’t act impulsively. ASSESS the offer … really look at the details, like the interest rates and repayment terms. DETERMINE how this fits with your spending AND repayment plan, or what you have to give up to make it work.
Even if you are diligent about making a sensible holiday shopping list, it’s easy to get caught up in the spirit of the season and go a little credit-crazy. But, if you are realistic about how much you can spend – and pay down quickly – it’s possible to ring in the new year with your credit scores intact.
