Caught up in the frantic frenzy of holiday shopping, some shoppers succumb to credit card deal offers proffered by enthusiastic sales assistants. That can cause credit scores to plummet rapidly.
To avoid regret when January credit card statements arrive, consumers need to refrain from accepting enticing, new credit cards while also not increasing balances on existing cards beyond what's possible in their budget to pay off when the bill is due.
“Racking up balances on your credit cards could decrease your credit score,” said Jim Triggs, a senior vice president of counseling and support of Money Management International, a Sugar Land, Texas-based non-profit debt counseling organization. “The more available credit you use, the more it could decrease your overall credit score.”
Roughly one-third of a consumer’s credit score consists of how much debt is incurred and how much of your existing credit limit is utilized. One rule of thumb is to never exceed more than 30% of your credit limit, because it makes you look riskier to lenders and could potentially increase your interest rates for future loans. If you have a credit card with a limit of $10,000 and you owe $3,500 on it, the utilization is at 35%. In that scenario, you would be exceeding the advised credit utilization ratio.
“The more you charge of your available credit, the more your score could be negatively impacted,” he said. “Paying the debt off without carrying over any of the balance will help offset the possible negative impact.”
Although retailers can offer approval for a new credit card on the spot before you complete the purchase, proceed carefully since opening “too many of these at once can lead to a dip in your credit score,” said Bruce McClary, spokesperson for the National Foundation for Credit Counseling, the Washington, D.C.-based non-profit organization. “While it may be tempting to take advantage of all the discounts commonly linked to in-store financing offers, it is best to use your personal savings and existing lines of credit in order to protect your credit score.”
Avoid Store Credit Cards
The excitement exuding from the store clerk can be contagious since the discount being offered for a new credit card and the purchases made are enticing and often substantive. Only accept them if you can pay off the balance quickly and if you are not planning on obtaining other store credit cards. Each time you sign up for a new credit card, another line of inquiry to your credit score is made and also shows up in the credit report.
“Be aware that adding credit inquiries and new credit accounts could negatively impact your credit score,” said Triggs.
Zero interest rate offers are equally tantalizing, but many of them contain conditions that need to be met in order for interest not to be charged.
“Beware of them because often the debt still accumulates interest over the allotted time if the entire purchase is not paid off in full during the time period,” he said. “All of that back interest could be added to your balance.”
Make sure you make your payments on time, because the rules are very restrictive and missing a payment by even one day could eliminate the zero interest rate offer. In that case, all of the prior interest will be added to their existing debt for the purchase of a large ticket item such as an appliance or furniture.
“It is important to understand all the parameters of a zero interest payment plan,” said Triggs. “If you do enter into one, it is important to have a plan to pay off the entire balance within the specified period of time and never make any late payments.”
Watch the Balance On the Card
Maxing out your credit cards to purchase gifts or attire for holiday parties is definitely a strategy that should be avoided at all costs, even if you intend to pay the balance off with a holiday bonus or your next paycheck.
“Among your available credit cards, it is best to use the one with the most available credit and the lowest interest rate,” said McClary. “The key is to pay off the balances right away in order to avoid adding interest and fees to the cost of your purchases.”
Determining a plan to pay off your holiday purchases is crucial so that you accrue as little interest as possible.
“If you do use credit around the holidays for gifts or other expenses, you should have a plan as to how you are going to pay it off as soon as you can,” said Triggs. “Otherwise, if you just make minimum payments, you could be still paying for this year’s Christmas for many years to come.”