When you’re holiday shopping, your credit score is probably the last thing on your mind. But seemingly unimportant decisions about which cards to use and whether to apply for new credit can affect your credit score come January.
The biggest holiday threats to your credit come from:
- Increasing your credit utilization, or the percentage of your credit limit you are using.
- Missing a bill payment, which creates a negative mark on your credit reports.
- Having too many credit applications, because they trigger “hard inquiries” on your credit reports, which can ding your credit score.
But if you know how to keep credit healthy, you can avoid or minimize the damage.
Be strategic with credit utilization
Credit utilization simply means how much of your available credit you’re using. It’s calculated both per card and overall. If you charge more than usual on your credit card or cards, your utilization can go up. Using more than 30% of the limit on any card can lower your score.
Credit expert John Ulzheimer says he advises people who want to protect their credit score to put holiday shopping on the card with the most available credit.
You may need to spread spending around to stay below 30% of your limits, but be aware that having multiple cards with balances can hurt your credit scores. Can Arkali, senior director at FICO, explains it this way: “A larger number of accounts with amounts owed can indicate higher risk of over-extension.” Credit scores are simply an estimate of how creditworthy you are, so anything signaling higher risk usually leads to a lower score.
What to do: Pay down credit card balances as soon as you can, and preferably get in the habit of paying them off every month. If your utilization does go up temporarily, know that the hit to your score will disappear as soon as a new, lower balance is reported to the credit bureaus.
Avoid missing payments
It’s easy to overlook bills in the crush of email and postal mail that arrives during the holidays. But paying a bill 30 days late can drop your credit score 100 points or more — and the damage doesn’t disappear quickly. It typically stays on your credit report for seven years, although the effect on your score fades over time.
What to do: Set up alerts for every credit card you have. “I have alerts set on all of my credit card accounts so I’m constantly being notified of charges, statements, due dates, etc.,” Ulzheimer says. “Leverage the tech.”
Beware of too many credit applications
Many retailers, both online and in physical stores, market credit cards as you check out. You may be offered a discount on your purchases, free shipping or some other perk in exchange for a successful credit application. But applying triggers a “hard inquiry” on your credit, and each inquiry can shave a few points off your score — possibly more if you have a limited credit history.
While there’s nothing wrong with applying for a card you want, doing so on impulse is often a mistake. “You’re using your credit report as a 10% off coupon,” Ulzheimer says.
It’s especially worrisome if you plan to shop for a mortgage soon. “If you’re going to apply for anything meaningful in the next 12 months, it’s a bad idea, because you have no idea what the new account — or accounts, if you open several — is going to do to your credit scores,” he says.
What to do: Be aware that credit applications can ding your score, and multiple credit applications can leave a pretty big dent. It’s smart to wait about six months between applications.
If you already opened a new card and regret it, Ulzheimer says you might as well activate it. The hard inquiry already happened and will stay on your credit report for two years, although its impact will fade much sooner than that. Meanwhile, you benefit from the additional credit limit, which helps your overall credit utilization level.