Holiday expenses can stack up quickly, with gifts, food and travel costs all contributing to your spending. But if you’re charging all your expenses to a credit card and planning to pay it off later, there can be consequences for your credit score.
Make sure you’re using your credit card wisely this holiday season. Here’s how holiday credit card spending can affect your credit score.
Credit Utilization Ratio
One important factor that affects your credit score is your credit utilization ratio, which is the amount of revolving credit that you are currently using. For example, if you have two credit cards with a combined credit limit of $2,000 and your balance between both cards is $500, you are using a quarter of your available balance, and your utilization is 25%.
If your utilization is too high, it can drag down your credit score. While there’s no “official” utilization that you need to keep your card balances under, it’s often recommended to keep your balances under 30%.
Credit Card Applications
If you do a lot of your holiday shopping in retail stores, you may often get asked at the checkout counter if you want to sign up for a store credit card in exchange for a discount or rewards points. Those immediate benefits may seem tempting, but you should know how credit card applications can impact your credit.
When creditors check your credit report before approving your credit card application, a hard inquiry shows up on your credit report, which can lower your credit score a little bit. While a single hard inquiry shouldn’t result in too much damage, and you can rebound pretty quickly, multiple hard inquiries in a short time frame could lower your score more than you’re comfortable with.
Avoid applying for too many credit cards at once, and make sure there are clear financial benefits before you open a new card.
If you get yourself into financial trouble over the holidays, it can put you at risk of paying your bills on time, which is bad news for your credit. Your payment history is the single biggest factor that goes into your credit score, and a single late payment can hurt your credit score, especially if it was in excellent shape before.
High balances can make it tougher to make your credit card payment on time, and even make it difficult to afford your other bills as well. Therefore, it’s beneficial to avoid missing a payment as much as possible.
Protect Your Credit After the Holidays
The best way to protect your credit is not to spend more than you can handle this holiday season. But if you did end up taking on too much debt, you need to work on paying it down. Lowering your credit card balance can positively impact your credit utilization ratio, help you save money on interest and make it easier to pay your bills on time. Check out our guide on how to pay off a large credit card bill.