The holiday season is a time for celebration, sharing and often, overspending. If you get caught up in the spirit of shopping, you can end up facing credit consequences down the road. Understanding the most common credit mistakes made by holiday shoppers is the first step in learning how to avoid them.
Some holiday shoppers find it easy to go overboard during shopping season and spend more than they budget. If you’re using a credit card to make those purchases, overspending can carry a high price. For starters, amounts you can’t pay off when your credit card bill comes may start carrying interest, which could be as high as 15 to 24 percent, varying by card. Carrying a balance can also lower your credit scores, since credit utilization — or the percentage of your available credit that you use — is an important factor in the credit score calculation. If you max out your credit cards, you’re also likely to face additional charges in the form of over-limit fees.
Applying for Too Many Store Cards
Holiday shopping season is also promotion season, and this applies to store-branded credit cards as well. Many department stores offer their own credit cards, encouraging customers to open new accounts with promotions such as discounts off your first purchase. While store-branded credit cards can offer deals, a common mistake is to open too many cards at once. Every new account application results in a “hard inquiry” and can ding your credit score by a few points, even if you never use the card. On most cards, if you carry a balance, you’ll be hit with finance charges and sometimes-high interest rates, so consider your ability to pay down balances when you are deciding to open additional store cards.
Missing Out on Purchase Benefits
In addition to retailers, many banks offer customer incentives to sign up for their cards. Rewards come in a variety of forms, from airline miles to hotel points to actual cash back. Some cards offer greater discounts at certain stores than others. If you’re using credit to finance your holiday shopping, understand your card’s terms and take advantage of the benefits they offer. In addition to credit card points, many issuers offer additional warranty protection or purchase return programs. If you’re not aware of your card benefits, you could make the mistake of buying purchase protection that you already have for free.
Not Understanding Credit Scores
There are generally a few major factors that go into calculating credit scores. These factors can be your payment history, amounts owed, length of credit history, credit mix (types of credit accounts) and new credit accounts. You don’t have to be a credit expert when you go shopping, but as a consumer you should be aware of what can affect your score. For example, opening new cards affects both the “new credit” aspect and “length of credit history” aspect (new accounts shorten the average life of your credit history). Charging large amounts over the holidays increases your “amounts owed,” which may also lower your score. If you’re unsure of where you stand, get a copy of your free annual credit report and review your credit standing before you trim the tree.