It’s the most wonderful (and expensive) time of the year. Though the holidays can bring joy and laughter with family and friends, it can also cause a lot of stress especially when it comes to your finances. According to a Healthline survey, finances was the top cause of stress (47%) during the holidays. Though the holidays can bust any budget and hurt your wallet, you may not realize that it can also affect your credit. Here’s how:
1. Spending more than you earn
Have you ever gone to the store thinking that you want to buy “just one thing” and then you end up leaving with 2 bags full of stuff, $200 later? You’re not alone and this can be common during the holidays.
You find stuff that would make the perfect gift! One of your favorite items is on sale and you must have it. Straying from your original shopping list can lead you to spending more than you earn, which is a surefire way to get into debt. If you are unable to pay off your credit cards in full, you’ll end up paying interest. And if you miss a payment? Your credit score will drop a bit and you could be hit with a late fee.
To keep your spending in check, remember that Christmas is one day. If you end up spending $1,000 with an APR of 15% and a minimum payment of $25, it would take you 56 months to pay off your balance. Not only that, you’d end up paying close to $400 in interest. Do you really want to spend the next four and a half years paying off your credit card that was used to pay for one day? I don’t think so.
2. Maxing out your credit
During the holidays you might be taking out your credit card pretty often. Soon enough, you could have racked up a pretty high balance on your credit card. You might not think anything of it if you plan to pay off your balance in full.
But aside from your payment history, your credit utilization is the second biggest contributor to your credit score. Your credit utilization is the amount of credit that you are using at any given time. Ideally you want to keep your utilization less than 30 percent. So if you have a credit limit of $1,000 you’d want to charge less than $300 to stay in this range. If you max out your credit limit and use all of the $1,000 offered to you, it could be a signal to lenders that you rely on credit.
Having a high credit utilization seems totally normal during the holidays when you’re spending money like it’s going out of style. But it could be hurting your credit score. To prevent this, you may want to pay off your credit cards more frequently or keep tabs on your spending.
3. Getting a new store credit card
You’re at a cash register and about to pay for your items when the cashier asks, “Would you like to save 10 percent on today’s purchase by opening a new credit account with us today?”
You’re already stressed about money, so a 10 percent discount is sounding pretty nice right about now so you say yes. While opening a store credit card might seem like no big deal, it could affect your credit score. When you apply for a new credit account, there is a hard pull on your credit report, which could lead to a slight drop in your score. If you open a lot of credit cards in a short period of time, this could be a red flag to lenders and result in a drop in your score.
Before you say “yes” to any new store credit cards, ask yourself if it’s really worth it. Do you need another card? Is the savings really that much? Will you consistently use it? More importantly, can you pay it off in full each month? You don’t want to end up with another card that you don’t really need or can’t handle — or worse, one that could lead to more debt.
4. Only paying the minimum
You spend so much energy, time, and money during the holidays. All of this can easily lead to a spending hangover after all is said and done. You are spent. Tapped out.
Trying to keep on track with your normal expenses, you might just pay the minimum on your credit cards. As we illustrated above, paying the minimum on your card can lead to paying a lot of interest and keep you in debt for years — even for a relatively small amount of debt!
If you can avoid it at all, pay more than the minimum. If you can, pay off your credit cards in full to avoid interest and help boost your credit score.
5. Closing your credit cards
After you see your credit card bill and getting hit with a full-on spending hangover, you may be ready to cut up the credit cards completely. Before you grab the scissors and call your credit card company, wait a minute.
Closing your credit card can actually adversely affect your credit score. Why? Because through your credit card you are building a credit history. An important part of your credit score is your length of credit history. By closing an account, you are losing some of that history.
Instead maybe put the spending on pause or only use the card for one thing like gas purchases. That way you won’t be prone to overspending and can still keep the positive history.
The holidays can be a wonderful time to spend with your family and friends but it can also be overshadowed by the stress of spending. You don’t want to tarnish your holiday season by getting into more debt or ruining your credit. That’s why it’s important to be mindful of these holiday temptations so you can keep your credit on track.