Financial Education Blog

Beware of holiday credit pitfalls

It’s easy to over spend during the holidays. The tantalizing sales and elaborate window sales make it easy to get caught up in holiday shopping. And while it may not seem important in the moment, over spending can have many implications on your finances. Instead of spending the new year trying to correct the damage, learn to recognize the pitfalls of holiday credit.


It will affect your credit utilization

Purchasing gifts with a credit card may make holiday shopping easier, but as your balances go up, so does your credit utilization (the amount you owe divided by your available credit). This in turn can make your credit score go down.

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.


Late or missed credit card payments

The holidays can be a whirlwind. Between the shopping, the traveling and everything else, it’s easy to overlook important things. While we’ve all forgotten to pay a bill on time, missing a credit card payment can really impact your credit score.


If you reach 30 days past due, 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 missed payment can result in long-term damage.


To prevent a missed or late payment, set up automatic payments. If you’re not interested in setting up automatic payments, many issuers will let you set email or text alerts for payments. You can also plug important dates into your phone or mark them on a physical calendar to help you remember.


Retail cards

It can be tempting to open a retail card when holiday shopping, especially when they offer large discounts or promos. But while those deals and discounts can occasionally be worthwhile, they can have an impact on your credit score.

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 major damage to your credit score.


Be smart

Making an effort to spend wisely this holiday season can help you avoid any post-holiday surprises and allow you to head into the new year with your credit score intact.

This information originally appeared at