The tradition of holiday overspending is as American as apple pie. Tradition or not, bad holiday spending habits can undoubtedly take a toll on your wallet, but that’s just the beginning. What you may not realize is that going overboard with your spending during the holidays can also damage your credit as well. Here’s where the problem will likely occur.
New Credit Inquiries
“Would you like to open a credit card account today and save 20% off your purchase?” You will likely hear this question, or some reasonable derivative, over and over again at the mall or at other retail stores this year. Everyone likes to save money, especially if you’re making a big purchase. But if you want to protect your credit scores, it’s probably best to answer this question with a solid “no thanks,” no matter how tempting the offer.
Opening unnecessary retail store cards can hurt your credit scores several ways. First, the inquiry or credit pull itself can have a potentially negative impact on your credit scores. This potential damage could be compounded even further if you apply for multiple new retail store cards during your holiday shopping spree.
Of course, new inquiries alone probably won’t sink your credit scores. The inquiry category of credit scoring systems makes up only a small percentage of your FICO and VantageScore points. But still, as a rule of thumb it really is best to only apply for credit when you really need it.
Too Many New Accounts
If you apply for a new retail store card, or numerous cards, you could be facing even more potential for credit score damage beyond just the new inquiries. FICO and VantageScore consider the average age of the accounts on your credit reports when calculating your scores.
This metric holds more weight than the inquiry metric, so beware! People with an older average age of accounts are rewarded with higher credit scores than those with younger averages. And applying for several at the same time will compound the problem.
More Accounts with Balances
Another way holiday shopping can come back to bite you occurs when you increase your number of accounts with balances. Whether you open new retail store accounts, take out new personal loans, or charge new balances on previously paid-off credit cards, the impact on your credit scores will not be positive. Scoring systems will penalize you if you have too many accounts with balances, which always happens when you open a new account at the register and use it to pay for your purchases.
I saved the worst for last. Credit scoring systems consider a metric called “revolving utilization,” which in English means the relationship between your balances and credit limits on your credit card accounts. This metric is as important as the previous three combined. The higher your balances, the more of your credit limit you’re using up, which means a lower credit score.
The problem with retail store cards, other than their sky-high interest rates, is their very modest credit limits. Most, if not all, newly opened retail store cards have a credit limit well below what you’d normally receive on a newly opened Visa or MasterCard. That means even modest purchases are going to result in a higher utilization percentage and a lower credit score, even if you pay the balance in full each month.
- You Can Improve This Part of Your Credit Score Almost Immediately
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- How Much Could You Save for the Holidays if You Started Right Now?
John Ulzheimer is an expert on credit reporting, credit scoring, and identity theft. He has written four books on the topic and has been interviewed and quoted thousands of times over the past 10 years. With time spent at Equifax and FICO, Ulzheimer is the only credit expert who actually comes from the credit industry. He has been an expert witness in over 230 credit related lawsuits and has been qualified to testify in both federal and state courts on the topic of consumer credit.