Now that the holiday shopping season is here (what, you didn’t know Halloween is the new Black Friday?), companies are pulling out all the stops to get us to spend. But watch out: There are some fairly common holiday spending behaviors that can do a number on your credit score. Here’s what the experts say you need to avoid.
Maxing out your cards. In truth, getting anywhere near your credit limit is a bad idea. “Your credit card utilization rate accounts for nearly a third of your credit score,” says Charles Tran, founder of CreditDonkey.com. This percentage of the credit you’ve used compared to how much you have available should be at 30% or less, and if you’re actively trying to raise your score, you should aim for as little as 10%.
This holds true even if you don’t revolve a balance, Tran says. “Even if you religiously pay off your credit card balance in full, the snapshot that the credit report captures might show a high balance, which has a negative impact,” he says.
Loading up a low-limit card. This is a corollary to not maxing out your cards because your credit is scored based on both your per-card as well as aggregate limits, explains John Ulzheimer, credit expert at CreditSesame.com. “The closer your balance is to your credit limit, the lower your credit scores,” he says. If you put $1,000 on a card with a $1,500 limit, that looks much worse than putting the same amount on a card with a $15,000 limit, he says, even though the amount you’re spending and the total amount of credit you have available hasn’t changed.
Ulzheimer notes this is even more important if you plan to pay off your holiday purchases over a number of months, because this maximizes the amount of time you’ll have a harmfully high ratio on the card.
Opening a slew of store cards. Yes, we know — you’ll get 10% or 15% off, or maybe you’ll even be able to jump that insane line on Black Friday. Opening a bunch of store credit cards is still a bad idea. Every time you apply for credit, your score takes a (small) ding, so making your way through the mall filling out applications can cumulatively have a noticeable effect on your credit score.
Closing a bunch of cards. “It can… be damaging to panic and close credit cards because you’re afraid of overspending for the holidays,” warns Bankrate.com analyst Jeanine Skowronski. If you know you can’t handle the temptation, then go ahead and close cards, but this should be a last resort because it can hurt your score because closing a card takes that credit away from your utilization calculation, she says.
Similarly, a lot of people think they’ll sign up for a store card just to get the one-time discount, pay it off and then cancel it. This is really a double-whammy for your score because you ding your credit profile twice, once when you open the card and again when you close it.
Taking the deferred-interest bait. “One marketing strategy that can get folks in trouble is the delayed interest offer,” says Beverly Harzog, consumer credit expert and author of “Confessions of a Credit Junkie.” Not paying by the end of the grace period or even missing a payment could trigger retroactive interest on your purchase, often at sky-high retail card rates. “You’ll owe the interest that would have been charged during that time period,” Harzog says. Not only does this make that purchase ultimately more expensive, it also increases the likelihood you’ll need to revolve that debt, which hurts your utilization.