December 23, 2020
Consumer Credit Expert
As the 2020 Christmas shopping season begins in earnest, consumers are likely concerned about how holiday spending will affect their finances. This year has seen more economic turmoil than any year since the Great Recession of 2008 – particularly affecting those in lower income brackets – so it’s understandable if the average shopper has a little anxiety.
Thankfully, much of that anxiety can be reduced with a little knowledge. While your Christmas shopping budget might need to be a little more modest than in previous years, there’s no reason why holiday spending should have any negative effect on your credit.
Here’s how holiday shopping can affect your credit – and what you can do about it.
Increased Utilization Percentage
Using your credit card for gifts, seasonal decor and other holiday expenses can result in an increased credit utilization percentage. This is calculated by dividing the current balance by the original credit balance. The utilization percentage makes up 30% of your credit score and is the second biggest factor.
Let’s say you spend $1,500 on gifts, trimmings for the Christmas tree and contributions to your favorite charity. The credit card has a $5,000 total limit and already carries a $500 balance.
Now, the card has a $2,00 balance and a 40% utilization ratio. Your credit score will decrease as your utilization ratio exceeds 10%, so you would likely see a drop in your credit score until the utilization falls below 10%.
Open New Cards
During the holidays, many retailers offer extra discounts if you open a store credit card. But opening a new card will result in a hard inquiry on your credit report, which will remain on your report for a year. The number of hard inquiries on your credit report makes up 10% of your score.
Opening a new card will also impact the credit history length, which is the average age of all your credit accounts. Every time you open a new account, the average declines. This component comprises 15% of your credit score.
Store credit cards also have higher APRs than regular credit cards, which means you’ll pay more interest if you can’t afford to repay the balance in full.
How to Avoid Hurting Your Credit During the Holidays
Decrease your utilization
You should try to pay off part of your balance before the statement period ends if you’re worried about a high utilization ratio. You can schedule an extra payment or do it manually.
Find other ways to get store discounts
If you want an extra discount without applying for a new credit card, sign up for the store’s email list to be notified of special deals and coupon codes.
Try to shop after Christmas to get the best deals. If you still want to open a new credit card, get a card with 0% APR on new purchases. This strategy lets you repay the balance over a few months without paying interest.
Make a budget
Americans accrued $1,325 worth of debt in 2019 on holiday purchases, and just under half of consumers surveyed said it would take three months or more to repay the balance.
Spending more than you can afford to pay back immediately can lead to a higher utilization percentage and more interest. Before shopping for gifts, look over your finances and decide how much you can comfortably spend.
If the pandemic has affected your finances, you’re not alone. A 2020 survey found that 37% of Americans can’t afford to buy all the gifts they’d like to. It’s better to buy a smaller amount of presents or skip them entirely than to end up with a large balance on your credit card.
We are here to help you reach your credit goals. Schedule a free credit analysis with a Financial Renovation Solutions credit consultant today.