Educational guidance on how to most efficiently handle credit & finances.

Don't let the Holidays Harm Your Credit!

It's that time of the year we all anticipate annually and we all love! The holiday season brings so much joy, so much food, so many gifts which also means so! If you have little ones you have to play Santa for or if you are just a sucker for big sales like I am then it's very easy to get carried away with spending around this time. It can also be very tempting to do majority or all holiday spending on credit cards since that's a great opportunity to accumulate a lot of rewards points and bonus cash etc to maximize savings. Did you know that if you don't plan carefully, you could end up with a drop in your credit score after it's all said and done? Let me explain how:

1. Applying for new credit in light of plans of excessive shopping: Every time you apply for a new credit account, you give permission for the lender pull your credit report which then results in whats called a Hard Inquiry. These inquiries drop your score each time. There is no set amount of points but yes it can be very few points but many people are not aware that it can sometimes be more than you expect, especially if your score is on the higher end. So be careful not to be so quick to apply for new credit cards as you may get a rude awakening to 20 point drop after 4 credit pulls. The 1st one may have only been 3 points but the next was 5 points, the next 8 points and the last 4 points. See how quickly that could add up?

2. Credit Card Utilization: If you are planning to put most of your holiday spending on credit cards please keep in mind that when ever you go over 30% utilization you will see your scores go down. If you are not familiar with this term; it is the amount of credit you have used in comparison to how much credit is still available. So if you have a $2,500 credit limit and you owe a balance of $250...then you have only utilized 10% which is very good. However if you have used $1250, then your utilization is at 50% which is considered high and will result in a drop in your credit scores being that credit utilization accounts for about 30% of your FICO scores. Utilization is the 2nd biggest factor in how your FICO scores are calculated next to Payment History which accounts for about 35% of your scores. This is something highly overlooked as many people think that simply paying bills late is the only thing that can really hurt your score. Keep in mind that keeping utilization under 30% is how you maximize your scores

3. Being too focused on Holiday Spending, neglecting regular bills: We know thanksgiving was at your house this year and you wanted to make sure you had the best menu, best decor and now Christmas is coming up and you want to make sure your family took the best portraits and sent out the best cards & you are giving the best gifts. Well, that can cause some people to forget they still have the same set of bills they have every other month. So if a bulk of money gets spent on holiday festivities yet it came from the income that usually covers the monthly bills, that can surely throw things off. Next thing you know, keeping up with the Jones caused a bill to get paid late and yes a 30 day late payment will drop your score for sure! So don't be this person!

So what to do?!

1. Request Credit Limit Increases! Instead of applying for new credit, just see if you can get higher limits on the accounts you already have. Around the holiday time is when banks get in the giving spirit as well. They know people are in the spending spirit so they often give out increases on their own, to ensure they get in on the action. However, some banks you just need to request it and they will gladly give you an increase to your limit. This will help you avoid going over your utilization and/or give you more spending power. Something very important to note though: ONLY REQUEST THIS FROM LENDERS WHO DO NOT DO A HARD INQUIRY to increase your limit. Ask them upfront if they do. If they say yes, then move on to the next lender and only apply for increases with those who say they do not do a hard inquiry. The reason I say this is because that too can drop your score and in my opinion is not worth it in most cases when you can get increases from banks without hurting your score.

2. Keep a log of all your credit accounts! Document each limit and keep tabs on the balances each month. Always follow the golden rule of keeping balances less than 30% of each limit on each individual card as well as less than 30% utilization for the total balances across all cards in relation to the total credit limits. For example: If you have $750, $1300 and $2500 credit cards then your total available credit is $4,550 so you would multiply that by 0.30 which would be $1365. That is what you would set in your mind as your cut off point for utilization!!! BUT, is it ok to put $1300 on the $1300 card and $65 on the $2500 card and leave a 0 balance on the $750 card? I'd advise against that. Even though you have 1 with 0 balance and one with low balance you would still be hurting your score bad due to the maxed out card. So always try to spread spending out, careful not to over utilize 1 card just because you are under utilizing the others. Best practice would be to keep the balance on the $750 card below $225, below $390 for the $1300 card and below $750 for the $2500 card. Making sure to keep each card under 30% will make it impossible to go over 30% utilization overall, so that's the easiest way to remember.

3. Make a Budget! Always plan ahead by rounding up your loved ones Christmas lists (including your own) early so you find out the prices and then determine what you can and can't afford. What ever you decide to buy, set a maximum spend limit for each item and tally up the total. Then assign where the money is going to come from for each item. You may decide to put them all on credit cards if you have room and can stay under 30%. If you don't have the room then at least you will know your cut off and will allocate the rest to come from paychecks, which you should be budgeting your income accordingly as well. Keep in mind that you still have you regular monthly bills still on top of any extra spending you plan to do for the holidays so budget to have money ready for those responsibilities as well.

We should be able to indulge in the holiday festivities, including shopping- and be able to treat ourselves and bring joy to our loved ones faces without setting back our finances or taking a drop in our credit scores. We just have to do it in a responsible way by setting a game plan. Having regret and buyer's remorse is not a good feeling so let's avoid that by keeping these pointers in mind. Happy Holidays!!!