‘Tis the Season!
By Mindy Leisure - Advantage Credit
It’s that time of year again. Christmas music, holiday lights, beautifully decorated trees and lots and lots of presents. It’s also the time of year when a lot of consumer’s credit scores drop the most. This could take the entire next year, if not longer, from which to recover. This is especially true if the same actions continue to be taken year after year.
You walk into a department store and find all your perfect presents! Life is good! Then you go to check out and they tell you that if you open up their store credit card you get 20% off your entire purchase! Sounds even better, right? Not so much. First, it will mean a revolving inquiry and that will result in a new revolving debt with no history. Moreover, because you found all those perfect presents it could mean that you not only have a new credit card but a maxed out credit card. Your credit score could end up taking a huge hit. That 20% discount may sound good at first but in the long run could end up costing you a lot more. In addition to it being a new debt with a possible high balance, there is the interest rate you will pay each month by carrying that debt over month to month.
Best practices would be to plan ahead which is not always possible. It would be ideal to start at the beginning of every year setting a limit for what will be spent on Christmas presents and then putting a little away with every pay check. At the end of the year there will be no reason to be tempted to open up a new credit card or to potentially max out an existing one.
To put this into perspective, credit card debt is about 30% of your credit score, length of your credit history is about 15% and new credit and the mix of credit you have is about 10%. So the combination is over 50% of your credit score. From this you can see that having new debt and debt with a high balance can have a huge affect on your credit scores.
If credit cards must be used for purchases, try to use a credit card that has a high credit limit. Balances on credit cards should optimally be kept at below 20% of the high credit. Consumers can also contact their existing cards to see if their limits can be raised. Most credit card companies will be willing to do this once a year. It never hurts to ask. If it’s a card with a good payment history then most likely they will be willing to honor your request. Another good thing to ask for once a year is to lower your interest. Again, this is something a lot of creditors will also consider once each year.
If a consumer does succumb to the temptation to open that new card for the discount, it should be paid off as quickly as possible. Always make more than the minimum payment each month, which is true of any balance that’s carried over on a credit card. By only making minimum payments it could take years to pay off a credit card with even a $500 balance depending on the interest rate attached to the card.
Opening up a new credit card is never a good idea unless it’s something you absolutely have to do. Just be prepared for the initial drop it could cause to your credit scores. Christmas is a wonderful time of the year but when it comes to spending don’t lose sight of what damage that could cause in the long run.
TMC - Chief Operating Officer
President/CEO - Pulte Financial Services