When you’re a kid, the most important question of December is “What’s under the tree?” When you’re an adult, it’s more like “What’s left in our bank account?”
Several gifts here, a few new decorations there — not to mention the travel and entertaining that take place in the last month of the year — and soon even the most careful budget is showing some strain. It’s no surprise, then, that you could find your credit scores a little worse for the wear this time of year.
Here are three common reasons your credit scores may drop around the holidays.
1. You Splurge a Little
About a quarter of us plan to spend more this holiday season than last, according to the National Retail Federation’s 2017 holiday forecast. And that’s on top of the record-setting 96% of us who shopped over the Thanksgiving weekend (including Cyber Monday).
All those purchases must be paid for somehow, and often they wind up on credit cards. Credit card balances are the main factor included in the “debt usage” portion of personal credit scores — the second most important credit score factor after payment history. As your balances creep up, your credit scores may go down.
It’s not a direct relationship (a 10% higher balance doesn’t mean your credit scores will drop by 10% for example); the impact will vary depending on the myriad other factors impacting your credit scores. But it’s not unusual to see a drop in your credit scores of 30-50 points due to high debt usage (depending on the model).
Don’t make the mistake of assuming that because you pay your credit cards in full, you are off the hook. If you pay your credit card bill near the due date, it’s very likely your card issuer has already reported your balance to the credit reporting agencies. The balance reported to the credit reporting agencies is not likely the balance that remains after you make your payment. Instead, most issuers instead report balances around the close of the billing cycle when your bill is sent to you.
Pro Tip: Keep an eye on debt usage and consider making early payments on credit cards with high balances. Consolidating balances with a personal loan may help if you can’t afford to pay off the card quickly.
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2. You’re Pressed for Time
You’re no doubt juggling a lot this time of year, and you’re out of your normal routine. That may be even more true true if you are a business owner or have a side hustle that’s impacted by seasonal sales. Paying bills — who has time to think about that? But if you forget to make a payment, you may wind up with a late payment on your credit reports that may be reported for up to seven years. (There’s also the risk that you’ll forget to make payments on retail cards you don’t use often. That’s what happened to me.)
How much will it hurt? As is always the case with credit scores, it depends. Generally, though, the higher your score to begin with, the greater the impact of the late payment. Drops of 20-50 points or even more due to a single late payment are not unheard of, depending on the credit scoring model.
Note that late payments are an even bigger risk for business owners than consumers. Most consumer bills aren’t reported unless you are 30 days late with a payment, whereas business accounts can be reported to business credit if they are just a day or two past the due date.
Pro Tip: Set up automatic payments (or reminders) so you never miss a payment. Most issuers offer these via email or text.
3. You Want to Save Money
The reason coupons and sales work is because most of us like a bargain. Similarly, there’s a reason why retail sales associates offer a discount for opening a new account when you are at the cash register: you have a split-second decision to make, and most of us aren’t great at split-second financial decisions.
While there are times opening a retail card makes sense, you want to be careful because doing so may impact your credit scores. Typically credit scores dip a bit after a new account is opened due to the fact that there is an inquiry placed on the credit report (which usually drops scores by 3-7 points, depending on the model). In addition, a new account can shorten the average age of your credit history, and a new account with a balance makes a credit profile a bit more risky.
But an even bigger risk is spreading purchases over multiple accounts and losing track of how much you’ve spent. You won’t come out ahead if you spend more than you can afford and wind up with expensive interest payments.
Pro Tip: Decide which credit cards make the most sense for your holiday spending and stick to one or two.
You don’t have to be obsessive about your credit over the holidays, but take a few minutes to check your credit reports and monitor your credit scores as part of your year-end financial review. Then you’ll be able to confidently go into the new year with a plan for a financially strong 2018. You can check your business credit scores and personal credit scores for free on Nav.
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