Just Say No to Holiday Debt

holiday credit card debt

The holidays are a time for celebrations, loved ones, perhaps a little too much eggnog and, for many of you, excessive debt. Unfortunately, if you make the decision to take on extra debt to finance all the extra holiday spending that doesn't fit into your budget, you are not only likely to waste a lot of money on interest, you may just be hurting your credit as well.

Arguably the biggest danger holiday debt can pose to your credit is the danger of allowing your credit card accounts to become over utilized.

The truth is the holidays can be a very dangerous time of year for your credit. Unless you want to spend a significant portion of the new year regretting your decisions, avoid the considerable downside holiday debt can often present.

The Danger of Over Utilization

Arguably the biggest danger holiday debt can pose to your credit is the danger of allowing your credit card accounts to become over utilized. VantageScore and FICO scores, two of the most popular credit scoring models used by lenders in the United States, are designed to pay close attention to the relationship between the credit card limits and the credit card balances which appear on your credit reports. This relationship is known in the credit world as your revolving utilization ratio.

When the credit card balances that appear on your credit reports increase, your revolving utilization ratios increase as well. In fact, it’s a mathematical certainty. From a credit scoring perspective, the lower your revolving utilization ratios, the better. Whether you are opening new credit card accounts or charging up higher balances on your existing credit cards to finance your holiday spending, an increase in your revolving utilization ratios could spell trouble for your credit scores.

The Danger of Too Many Inquiries

Considering opening a new credit card or loan to finance your holiday expenditures this year? You might want to think twice before making your decision. Applying for too many new accounts could come back to bite you.

Whenever you apply for a new account, the lender is going to check your credit report as part of the application process. Checking your credit is one of the ways a lender determines whether doing business with you is a good risk. What you may not know, however, is that these credit checks, also known as inquiries, have the potential to damage your credit scores. Not every credit inquiry will automatically impact your scores negatively (that is a myth); however, if you rack up a lot of inquiries in a short period of time, your credit scores will likely suffer.

The Danger of Too Many Newly Opened Accounts

Did you know that the simple act of opening a new account could also potentially have a negative impact on your credit scores? One of the factors scoring models consider when calculating your credit scores is the "average age of accounts." The older that average, the better. Opening new accounts will typically cause your average age of credit to decrease, and when that happens your credit scores could be adversely affected.

The Danger of "Skip-a-Payment" Offers

Sometimes during the holidays your credit card issuer may offer to allow you to skip a monthly payment, if you wish. That’s a really bad idea. What those offers don’t generally highlight is the fact that interest will still accrue on the balance even if the card issuer has allowed you to skip your minimum monthly payment. And, if you’re not paying down or paying off the balance, there’s going to be more interest generated for the card issuer. Your best bet is to either make your payment as usual, or better, pay the card in full.