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Between planning, prepping, shopping, wrapping, and celebrating, few of us take time out of our busy holiday schedules to think about our credit scores. But waiting until the holidays are over to worry about your credit can be like taking the gingerbread out of the oven after it’s already burned: too little, too late.
Unfortunately, your credit score is a lot harder to fix than a bad batch of cookies. Instead of spending the new year on damage control, get ahead of the problem by recognizing potential trouble areas. Here are three common ways your holiday shopping could hurt your credit score — and how to avoid them.
1. Sky-rocketing credit utilization
It’s no secret that we tend to spend a lot during the holiday season, and a good portion of that spending winds up on our credit cards. But as your card balances go up, your credit utilization ratio (the amount you owe divided by your available credit) increases. And that can cause your credit score to decrease.
FICO looks at the utilization ratio of your individual credit cards and your total utilization ratio across all revolving credit accounts. To calculate your utilization ratio for a single card, simply divide your credit card balance by your credit limit. For example, if your card has a $100 balance and a $1,000 credit limit, the utilization ratio for that card would be: $100 / $1,000 = 0.1 = 10%. The same formula works to determine your overall credit utilization, which is just as important. Just divide your combined credit card balances by your total credit limit across all of your cards.
You want to keep both your total and per-card credit utilization ratio below 30% to maintain a good credit score. So it’s best to avoid putting large balances on credit cards with low credit limits. Those low limits could make your utilization increase sharply, even with small purchases.
If you do wind up with a utilization spike, don’t panic. Damage to your score from high utilization has an easy solution: Pay down your balances. Credit card issuers report your card balances to the credit bureaus every month, so your credit score should rebound soon after your utilization rate decreases.
2. Late or missed credit payments
We all celebrate differently, but one near-universal holiday tradition is a whirlwind of activity. And while the COVID-19 pandemic may mean we travel less this season, a pandemic certainly doesn’t make anything easier (or less hectic). Of course, the busier we are, the more likely we are to overlook important things — like credit card bills.
Missing your due date by a few days is one thing. You’ll pay a late fee, but your credit score will be safe. If you reach 30 days past due, however, your issuer will report your account as delinquent to the credit bureaus. Your payment history is the biggest factor in your credit score — it’s worth 35% of your FICO® Score — so even a single late payment can result in long-term damage to your score.
The easiest way to make sure your cards don’t get forgotten during the holiday rush is to set up automatic payments. You can choose how much to automatically pay each month. And as long as you make at least the minimum required payment before your due date, your account will remain in good standing.
If automatic payments don’t fit your needs, you still have a number of options to keep on top of your due dates. Many card issuers will let you set email or text alerts that can include due date notifications, and most cellphones let you set calendar reminders. Or go full old-school and put up a sticky note (or three) wherever you’re most likely to see them.
3. New card credit shock
Whether you’re lured in with a big sign-up bonus from your favorite issuer or seduced by a store card’s promo pitch, it’s easy to be tempted into opening new credit cards during the holidays. While those deals and discounts can occasionally be worthwhile, your credit score doesn’t care about how much you saved.
The most direct impact to your credit score from a new card is through the new accounts factor, which is worth 10% of your score. The hard inquiry from a new credit application can cause a small dip in your score, and it stays on your credit reports for up to two years.
It’s also important to consider how opening a new credit card will affect the average age of your accounts. The length of your credit history is worth up to 15% of your FICO® Score, and adding a brand-new account will decrease your average account age. If you already have a long credit history, adding a new account won’t have a huge impact, but if you have limited credit history, be prepared to see a bigger credit score drop.
The most obvious way to avoid credit damage from new cards is to not open any new credit accounts in the first place. If you find a deal too good to refuse, however, don’t think you automatically have to pass. One new card — or two, if you have a strong credit history — generally won’t cause catastrophic damage to your credit score.
Play it safe this holiday season
Although it’s easy to get caught up in the holiday rush, some things shouldn’t wait for the new year to hit your radar — especially your credit. By taking the time to ensure you’re spending smartly, you can avoid any post-holiday credit surprises and head into the new year with your credit scores looking their best.
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