Protecting Your Credit During the Holidays

t’s officially the holiday shopping season and we’ve supposedly lost all self control over our finances until the end of 2017, when we’ll find magically find it. The holidays are supposed to represent a time of family, joy, and giving – or at least that is what the movies tell us. However, for a lot of Americans the holidays have also come to represent a time for overspending, financial stress, and credit score damage.

At the risk of being a holiday buzz-kill, here are a few tips which may help you protect your credit during the holiday season. The good news is that if you make a plan and stick with it you can still enjoy this time of year immensely, but you can do so without having to suffer through a financial hangover afterwards.

Set Limitations

Budgeting is important at any time of year, both from a financial and a credit perspective. Yet budgeting is rarely more important than during the holidays. If you are like most people, the holidays probably usher in a lot of extra expenses which you may not experience throughout the rest of the year. As a result it is essential that you set spending limits in advance, before you lose your minds.

Your best bet is to save up a surplus of funds for your extra holiday shopping ahead of time. By saving extra funds in advance you can hopefully sail through the holiday season without getting into any extra debt. Another option to consider is cutting spending in other areas in order to free up additional funds in your budget. For example, you might consider eating out less or spending less on entertainment during this time of year in order to compensate for some of the other unusual spending you may encounter.

Racking up extra credit card debt is almost certain to have a negative impact on your credit scores (unless you can pay your balances off in full before they report to the credit bureaus). However, if you already know that you are planning to finance some of your extra holiday expenses on your credit cards then you can still create a plan to minimize any credit score damage.

Avoid Retail Store Credit Cards

“Would you like to open a store credit card to save 20% off your purchase?” While this phrase may sound innocent enough on the surface – because everyone likes to save money – the truth is that opening a new retail store credit card might damage your credit scores. In fact, new retail store credit cards have the potential to damage your credit 3 different ways.

First, applying for the new account and allowing your credit to be pulled may lead to lower credit scores whenever a new inquiry is posted to your credit report. (If you apply for new accounts at multiple stores the negative impact is potentially magnified.) Second, a new account can lower your average age of credit, also potentially bad for your credit scores. Finally, retail store credit cards are notorious for having lower credit limits. Therefore, they are easy to over utilize – a factor which credit scoring models like FICO and VantageScore pay close attention to when calculating your credit scores.

A $300 balance on a retail store credit card with a $300 limit is likely just as bad for your credit scores as a $5,000 balance on an account with a $5,000 limit. Both equal 100% utilization and will likely damage your credit scores almost equally, even though the actual dollar amounts on the balances are very different. If you choose to open a new account to finance your holiday shopping you might want to consider a general use credit card or, better yet, a personal loan instead.