Can Holiday Spending Hurt Your Credit Score?

January 6, 2022
Shawn Lane
Consumer Credit Expert


The holidays are not a time to pinch pennies. There’s nothing wrong with loosening the purse strings, giving generously, and using this time to focus on friends and family instead of money.

But you at least want to make it through to the end of the year with your finances intact, which means avoiding any big hits to your credit. Here are the ways in which holiday spending can potentially impact your credit – and the best ways to avoid them.

If You Have a High Utilization Ratio
Many Americans spend more than $1,000 on holiday presents and other related expenses. If you charge those purchases to a credit card, you may wind up hurting your credit score.
Here’s how that works. The second most important factor in determining your credit score is the credit utilization ratio, or how much credit you’re using compared to the credit limit. If your credit utilization ratio exceeds 10%, your score will likely decrease.

For example, if you have a credit card with a $5,000 credit limit, you shouldn’t have a statement balance of more than $500. If your balance does exceed $500 at any time, try to pay it down below $500 as soon as possible.

Before you go holiday shopping, check your credit card balance, and make sure the utilization ratio won’t exceed 10% once you’ve made the purchases. If you’ll have to go over the 10% utilization percentage and can’t pay the balance off right away, contact the credit card company and ask for a credit limit increase.

Increasing your credit limit will decrease your total utilization ratio and possibly improve your credit score. It won’t affect your interest rate, but it will at least mitigate the impact on your credit score.

If You Go Over the Credit Limit
Every credit card has a total credit limit, which is the maximum amount you can charge on the card. But in some cases, you can exceed that limit.

If this happens and you don’t pay off the excess amount, you may be charged a higher APR, known as a penalty APR. The penalty APR can last as long as six months and can be as high as 29.99% APR.

More importantly, if you don’t pay off some of the balance before your statement period closes, the credit card company will report a very high utilization ratio to the credit bureaus. This could severely impact your credit score.

If You Use a Buy Now, Pay Later Program
Buy Now, Pay Later (BNPL) programs are becoming more common for shoppers who can’t afford to buy an item right away but don’t want to pay credit card interest charges.

While most BNPL companies don’t report on-time payments to credit bureaus, some will report late payments. A late payment could drag your score down by as many as 180 points, depending on how late it is. Your payment history makes up 35% of your credit score and is the most important factor.

If you sign up for a BNPL program, make sure you make every payment on time and in full. If you link your BNPL payments to a bank account, verify that you’ll have enough funds to cover any charges. If you do accidentally forget to make a payment, fix it as soon as possible. According to the Fair Credit Reporting Act, companies can’t report you late to the credit bureaus until you are 30 days late, so you may have some wiggle room.

If you miss a BNPL payment, you may also be charged a high fee that exceeds what you’d pay with a credit card, sometimes as high as 30% APR. The typical credit card APR ranges from 15% to 22% APR.

The Bottom Line
It’s easy to get swept up in the Christmas spirit when you’re shopping for gifts and buying holiday décor, but watch how much you spend. If you go over budget, you could still be paying for those holiday gifts long after Christmas is over.

Write down how much you can afford to spend right now. Don’t forget to account for extras like office holiday parties or your book club’s Secret Santa gift exchange. As you buy gifts and other expenses, track how much you’ve spent and how much you have left.

If you have any questions or need help improving your credit, schedule a free credit analysis with a Financial Renovation Solutions credit consultant today.