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Will your holiday shopping affect your credit score?

I had an interesting question hit my inbox the other day – it was a little long so I won’t paste it here but the basic question was whether holiday shopping will have an effect on your credit score. The reader’s concern was that he’ll be doing a lot of his holiday spending on credit cards, in order to maximize his credit card rewards, and he plans on buying a house next year and doesn’t want to do anything to jeopardize his credit score. 1% rewards sounds great unless it costs you 1% on a mortgage!

My first inclination was to answer that there was no way your holiday shopping could affect your credit score… but it might actually affect your score.

Credit Utilization

Credit utilization [3] is a measure of the percentage of your existing credit you are currently using. It’s reported based on your statement balances at the end of each statement cycle. If you have $10,000 of available credit and your credit card bill says $2,000 owed, your utilization on that card is 20%. As your utilization gets higher, your credit score is negatively affected. No one knows how much is too much but with holiday spending you’re likely going to have a higher utilization than you normally do, which can drop your score a little.

The easy counter to this potential problem (which I believe is minimal) is to pay off your balance before the end of the statement cycle. Utilization is based on the reported balance. If you pay off your bill before the end of the statement cycle, it’ll report whatever the balance is at the time of close. So you can spend $2,000, pay off $1500 before the billing cycle ends, and it’ll only show $500 owed for a utilization of 5%.

If you’re concerned about this negatively affecting your score, simply pay your balance early.

Unable to Make Payments

The bigger problem is that you start spending like crazy on a credit card and are unable to make the payments when the statement comes due. If you diligent save and have the cash on hand, this is less of a concern. If you don’t and are just hoping your income will help pay for it, it’s a risky move. Your credit score won’t get hurt if you make the minimum payments, so you have some protection there, it’ll only go down if you miss payments entirely.

The problem with this concern is that it’s based on an unpredictable future. What if you have the cash, charge it to a card, and then an emergency happens? What if it depletes your emergency fund [4] and you need to dip into this holiday fund? It’s probably going to be an unlikely scenario but life throws unlikely scenarios at us all the time.

Get A New Card for Shopping

Finally, the only other way this can ding your score is if you, as you shop, decide to take advantage of one of those 20% off for new cardholder promotions. Department stores love this. When you apply for a new card, the hard inquiry [5] will ding your score by a few points. You’ll have to offset this with your plans to buy a house and see how much you’ll be saving. If you won’t be buying for another year, it’s probably going to recover by then as long as you behave.

Best way to avoid this is to avoid opening a new card. If you plan on buying a house or a new car (with a loan) in the next few months, I’d skip this.

For the credit experts out there, did I miss anything? Am I providing sage advice or leading our poor friend astray?

(Photo: gaspi [6])