The holiday season is upon us, and you know what that means. Shopping. (And pumpkin spice lattes, of course.) Before you buy gobs of candy for trick-or-treaters, plan your Thanksgiving feast and look for the perfect Christmas gift, remember this: shopping can either hurt or help your credit.
Why is credit so important?
In the world of finances, your credit is your reputation. It affects your chances of getting a loan with a good interest rate, acquiring certain job positions and even housing. Your credit score is built upon several things, including types of credit used, credit history, credit limits and utilization, and payment history.
Today, we’re focusing on the two biggest influencers: payment history (35% of your credit score) and credit limits and utilization (30% of your credit score).
Payment history includes, among other things, your habits for payng back bills. Constant late payments lead to negative payment history and consequently, bring down your credit score.
Credit limits and utilization revolve around how much credit you use. If you have a credit card with a $3,000 limit, are you constantly using the full $3,000 (100% utilization)? Maintaining a low usage rate is best – regardless of your actual credit limit.
What do pumpkins and mistletoe have to do with my credit score?
So maybe pumpkin spice lattes and new twinkle lights can’t literally hurt your credit, but the amount of money you spend on them can. Your credit will take a major hit if you consistently spend more than your means and get behind on your bills.
Did you know that over $600 billion was spent during the winter holidays last year, with the average American spending over $700 for food, gifts, and decor?¹
Everyone wants to make the holidays festive, entertain family and friends with the best food and fun, and show generosity with gifts for all. Which is well and good, don’t get us wrong. We love and look forward to holiday cheer as much as the next person.
What we don’t want is that holiday cheer ending when you get the bills. Unfortunately, bills don’t take a winter break (Wouldn’t that be awesome?!), and credit card companies still expect payments.
How do I improve my credit and my holiday cheer?
With attention and planning, this winter could provide an incredible chance to improve your credit by being diligent with finances. What’s more is it’ll help you stay calm amidst the shopping frenzy, and when you find that perfect gift for your loved one, you don’t have to worry about straining your wallet.
Here are five steps to get you started:
1. Know your credit limits
Before you join the mob of people enjoying Black Friday specials, jot down all your credit cards and their respective limits, as well as their current balances (if any).
2. Calculate a utilization limit
Now that you know the limit for each credit card, calculate how much you can spend with each card while still maintaining a positive utilization rate. Exceeding even 30% of your available credit can be damaging, so leave yourself some wiggle room. A good place to start is only using 25% or less of your credit limit. For example, if you have an $8,000 line of credit, then you would try to keep the credit card balance under $2,000 at all times.
As you shop around, keep track of which card you use and how much you’re charging to that card, so you can better gauge how close you are to the utilization limit – and refrain from going over it.
3. Stick to a budget
Just because you have a credit card with an $8,000 credit limit doesn’t necessarily mean you should spend $8,000 on holiday gifts. And calculating a $2,000 utilization limit doesn’t necessarily mean that you can spend $2,000 without consequence either.
The spending calculation you should adhere to is the dollar amount that fits your budget. As the holidays approach, think about all the purchases you want to make (candy, decorations, gifts, donations, etc.) and how much money you can afford to put towards those purchases while still meeting your other expenses (like rent and utilities).
Living within your means by sticking to a realistic budget will help you stay on track with credit usage and make it easier to pay off your bills on time.
4. Set up bill alerts
Sometimes, people miss a bill payment simply due to distractions. You see the familiar envelope with the monthly bill, and you toss it aside because you’d rather make some hot chocolate, but putting off the sweets for just a minute and making a point of paying your credit card bill is a small step that makes a huge difference.
Always making late payments influences your credit score and losing track of payments during the holidays are a sure fire way to get behind and stay behind. So… set up alerts on your phone for when a bill arrives and when it’s due. Unless you pay your bill the moment it becomes available, insert periodic reminders into your calendar so you don’t find yourself waiting until the last minute and increase your chances of incurring a late fee.
5. Pay bills in full
Paying bills on time and in full are equally important. Why? When you only pay the minimum, you actually increase the amount of debt you carry, and you increase the amount you have to pay for your credit card purchases because of interest.
For example, let’s say you make a $10,000 purchase (a bit excessive but works well for this demonstration). You use a credit card with 15% interest to make the purchase. You make no other purchases with the card, and the minimum monthly payment required is 2.5% of the balance. If you only pay the minimum each month, it will take 23 years to pay off, and you will pay an additional $9,637 in interest.
Carrying around that kind of debt and paying off so much interest is certainly enough to kill the holiday mood.
How can I keep track of everything?
So keeping track of credit card usage and bill payments will help you build and maintain good credit, but that’s a lot to remember, especially when you’d rather focus on finding a great Christmas tree.
With Wallet, you can squeeze all your financial information into your pocket for easy access. Wallet is an online money management tool that allows you to see all your accounts in one place, track your spending (credit card transactions, cash and more), and even set alerts so you never miss a bill or go over budget.
You can also keep your credit in tip-top shape (or learn more ways to repair it) by working with a Money Coach. All of our money coaches are Certified Credit Counselors who have years of experience in financial services and are familiar with the Fair Credit Reporting Act, and many have additional accreditations like Certified Credit Report Reviewer – CCRR®.
A Money Coach can help you keep the holidays bright while integrating smart financial practices into your daily life. You can talk about everything from budgeting, bills and credit cards, to mortgages, retirement and investments. And, of course, how holiday spending can boost your financial wellness.
Call 888-724-2326 to get started.
¹Allen, Kathy Grannis. “The Long and Short of America’s Consumer Holiday.” nrf.com. NRF, 1 May 2014. Web. 20 Oct. 2014.
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