NEW YORK (MainStreet) — Holiday shopping can wreak havoc on the credit scores of consumers, even the highly disciplined ones who budget for their purchases.

During the next month, it is easy for consumers to go over their limit, spend over their credit line or miss one payment, which can all lower your credit score and impact it severely.

One mistake shoppers make is giving into the retailer’s ploy of getting a consumer to open a new credit card so they can save 10% on their purchases that day. Instead of reaping the rewards, future lenders see another inquiry on your credit report, said Gail Cunningham, spokesperson for the National Foundation for Credit Counseling, the Washington, D.C.-based non-profit.

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Another big error is using a store’s “buy now, pay later plan,” which means the consumer is opening a new account that appears on their credit report. Since that line of credit is equal to the amount of the purchase they are making, the shopper is automatically maxing out their credit on that account, she said. That action negatively impacts the scoring model’s credit utilization ratio.

“Short-term thinking can lead to long-term problems,” Cunningham said. “Creating holiday debt that cannot be responsibly managed can result in late payments that will remain on a person’s credit report for seven years, potentially lowering the credit score and limiting access to future credit.”

The impact of paying one of your bills late is severe, said Kevin Gallegos, vice president of the Phoenix operations for Freedom Financial Network, a company which helps consumers resolve debt issues.


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While consumers get caught up in the throes of holiday shopping, celebrating and traveling, it can become easy to forget to pay a bill. Neglecting to pay a bill can lower your credit score.

What is even more detrimental is if you miss your payment even one time, the credit card company can raise your APR or cut you off completely, said Jeff Golding, CEO of WilliamPaid, a Chicago-based company which allows people to build credit through paying their rent online for free.

“If you can’t afford, it, don’t buy it,” he said.” If you are banking on getting some money from a bonus or tax refund, wait until it is in your hand. There are still plenty of deals to be had.”

Missing one payment when you have ten accounts, including rent or an auto loan, affects your credit score less compared to someone who is younger and only has three accounts, Golding said.

“It is all relative depending on your other bills,” he said. “You are still exhibiting your ability to pay the majority of your debt on time. You can only put things off for so long. You have to make smart, sound and prudent financial decisions so you can avoid having an item cost 10 times as much from interest and fees.”

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Of course, during this time of heightened spending, consumers are blissfully unaware of the danger to their credit: a newly released survey from TransUnion indicated that a majority of consumers (60%) are not concerned about how holiday gift buying will affect their credit.

"Our survey found that shoppers are not connecting their heavy reliance on credit cards during the holidays to potential impact on their credit worthiness," said Ken Chaplin, senior vice president at TransUnion. "Detrimental effects to your score can be short-lived if holiday balances are paid off each month. It's important to remember that carrying a balance month after month could have a negative effect on your credit standing."

It's important for consumers to take a more active and vigilent approach to protecting their credit. Being proactive can prevent minor dings or more detrimental consequences to your credit.

"During the holidays and year-round, it's important for consumers to be aware of the impact of spending behaviors on their credit," said Chaplin. "Subscribing to a credit monitoring service and regularly checking their credit report can help consumers be more attuned to the implications of spending on their score."

Also, it's important for consumers to learn what percentage utilization is for credit cards and why that is such a crucial factor. If you have a credit card with a limit of $10,000 and you owe $3,500 on it, that's a 35% utilization. That percent is the upward limit, consumers need to be wary of this, Gallegos said.

“Anything over 35% and can impact credit scores,” he said. “Over 50% will have a definite negative impact on a credit score.”

Maxing out your credit card even temporarily during the holiday season for a month or two is a big mistake. A maxed-out card will impact the score very negatively, Gallegos said.

“In the holiday season, it can be all too tempting to 'charge up' or 'max out' a card," he said.

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Being a savvy shopper this season can be as easy as putting the plastic away. Research has found that shoppers spend more when paying with a credit card. For some or all of your holiday purchases, many consumers find it helpful to put their credit cards away and shop with cash or a debit card, Gallegos said.

“These purchases will have no impact on credit scores,” he said. “Don’t get carried away and think twice about canceling a credit card with a long positive history. The longer you hold a card, the more valuable it is in your credit score determination.”

Nearly one in four shoppers will pay for holiday items with plastic, which is 10% higher than last year, according to the National Retail Federation.

The interests rate offered by retail stores could reach 20% or higher. Some of those credit cards are issued by finance companies, which can have a negative effect on credit scores in some cases, Gallegos said.

Opening multiple store credit cards in a short span of time can ding your credit profile. Most people are better off using their regular credit cards, he recommends.

Creating a budget and sticking with it will help consumers avoid more stress, have a “clearer conscience, not to mention no lingering holiday debt in the new year,” Gallegos said.

“Charging only what you can pay off in full at the end of each month indicates that you are living within your means,” he said. “Maybe that says that your ‘means’ are meager. That’s O.K.. The holidays really aren’t supposed to be about creating ski slope-sized piles of presents under the tree.”

--Written by Ellen Chang for MainStreet


 


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