The holidays have a tendency to throw things out of whack – your schedule, your budget and possibly even your credit.
Your in-the-moment decisions at the register as well as the cumulative effects of holiday spending can have a ripple effect on your credit — but doing the following will help it emerge from the holidays unscathed or even improved.
Know where you stand before the holidays get into full swing
Being overextended or in default can lower your credit score and block your access to new credit. So it’s important to pull your credit reports for a clear credit snapshot before the holidays do any more damage.
“Your credit report is a good place to start with a financial review for holidays because it’s going to show you how much you owe,” says Gail Cunningham, spokeswoman for the National Foundation for Credit Counseling. “You may have forgotten some of those accounts. Getting your credit report will really be eye-opening.”
You can get a free credit report from each of the three major bureaus every year from AnnualCreditReport.com. If you’ve exhausted those, consider signing up for a free credit-tracking service like Credit Sesame or Credit Karma. Those sites let you access your Experian and TransUnion data, respectively, and get an overview of your existing accounts and how much you owe on each.
So what if the picture of your credit isn’t flattering?
“The worst-case scenario is you have people still paying for holiday 2013,” Cunningham says.
If that’s you, put your cards away and do the holidays on a cash basis – not that it’ll be easy.
“That’s going to mean rethinking gift giving, travel, entertaining, everything to do with the holidays,” Cunningham says. “But it’s not a gift to anyone to get into financial distress as a result of holiday spending.”
Watch your utilization
Determining your credit utilization ratio is a simple. Divide how much you owe by how much available credit you have.
If your utilization is too high, it can hurt your credit score (30 percent of your FICO score, for example, is determined by amounts owed). Cunningham recommends keeping utilization under 30 percent.
If you’re spending more on your cards over the holidays, it stands to reason that your utilization could creep higher and lower your score. But should you care? That depends on your plans right after the holidays, says Doug Minor, credit expert, legal consultant and author of the upcoming book “Your Credit, Your Life.”
“The question is, is your utilization going to put you in a position where your score is low enough to cause a problem?” Minor says.
Planning on getting a car loan or a mortgage early in the new year? A lowered score could affect the terms and interest rate, costing you more money in the long run. However, if you have no immediate need for new credit, that holiday-related blip in your score may not affect your life at all. Plus, if you pay down your balance and reduce your utilization, the credit damage will be undone.
“The potential for [utilization] to impact your credits score is only for that period of time that higher balance is reported,” Minor says.
Even so, don’t carry a heavy utilization for too long.
“Nobody has a crystal ball that will tell you if you’re going to need credit for an emergency,” Cunningham says.
If, for whatever reason, you want to keep your utilization low over the holidays (and still want to spend more on your cards), one solution might be increasing your available credit beforehand. Doing so makes any balances lower by comparison and lowers your utilization. If your score is good (and you can handle the new line responsibly), you might apply for a new card. Or, you might ask your issuer for a credit limit increase on an existing card.
Watch out, though: Applying for new credit means hard inquiries on your credit reports, which can also lower your credit scores. If you’re lucky, however, credit limit increases on existing cards may not require a hard inquiry.
“When you contact the creditor and ask for the increase, ask if they can increase it based on your past payment history with them, rather than running a credit report and causing an inquiry,” Minor says.
Scrutinize store card offers
Seeing a frighteningly high number on the register might make applying for the store’s credit card and saving an extra 5 percent, 10 percent (or even more) a tempting prospect. Just think ahead a bit.
“You’ve just put another inquiry on your report,” Cunningham says. “And you’ve put more plastic in your wallet. More plastic means more temptation.”
Plus, Cunningham points out, store cards often come with credit limits that match (or are barely above) the amount of your purchase.
“So you’ve just maxed out that new card,” Cunningham says.
Minor says applying for a store card may be worth it for a large purchase and a significant discount – assuming you’re not the type to apply for every card you’re offered.
“Just be conscious and selective and make sure that it’s worth it to you to cause that inquiry,” he says.
Use 0 percent deals responsibly
Some cards offer an introductory period (generally six months or more) that gives you a 0 percent APR on purchases. That could provide some breathing room if you need a couple extra months to pay off your holiday purchases.
What’s more, if you use that card “proactively and responsibly,” it can help your credit, Minor points out.
“Because now you have another credit line showing on your profile, and now you have more of a limit to use,” Minor says. “Used correctly, it should be a positive.”
Just make sure you know the rules. A late payment might end your 0 percent period prematurely. And some store cards that offer 0 percent deals have another twist, Cunningham points out: retroactive interest. If you pay late, you’ll be charged interest, retroactively, from the date of purchase.
Remember your payment due date
If you miss a payment date amid the holiday shuffle, you shouldn’t have to worry about credit damage – as long as you miss only one payment. Issuers generally won’t report late payments to the credit bureaus until you’re more than 30 days late, Minor says. So, if your due date happens to be Dec. 25, and you realize your mistake on Jan. 10, expect a late payment fee.
“But as long as it doesn’t go past that 30-day point, it won’t affect your score,” Minor says.
Messed up? Turn it around in the new year
If you emerge from the holidays with maxed out cards and not enough funds to pay them, it’s vital to undo the damage not only to save yourself interest payments, but to get your utilization down to a healthy level so that you become a good credit candidate.
Remember when you calculated how much you owed across all your cards before the holidays? Get back to that amount, and do it quickly.
“Say your balance before the holidays was $1,000,” Cunningham says. “In January 2015, it’s $2,000. So $1,000 is what you must absolutely promise to pay in the first quarter to get yourself even.”
Also, don’t go delinquent. Skipping payments for several payment cycles will trash your score. If you can pay only the minimum, pay that.
“I don’t want people to make a habit of just paying the minimum,” Minor says. “But if you’re a little thin because you had to spend on the plane tickets home, make the minimum payment, or a little bit more than that, until you’re in a better situation.”
Whatever damage your credit undergoes over the holidays, remember this:
“Your credit score is not a life sentence,” Minor says. “If you’re proactive, it will recover in time.”