HOLIDAY DEBT: A cautionary tale
We’re just entering the busiest shopping season of the year. Exciting marketing terms like Black Friday, Cyber Monday, and Green Tuesday can’t completely obscure what’s really happening: We’re spending a lot of money in a short amount of time.
That’s not to say that holiday shopping is bad: The activity is pleasing, it helps employ seasonal workers, and in some cases it can mean the difference between a good year and a bad year for retailers. However, it’s also true that holiday debts can blow back and lead to lower credit scores right around the New Year, when those debts appear on your credit reports.
Holiday debts aren’t strictly any different than debt incurred in, say, the spring. Debt is debt, and it can lead to lower credit scores. But the holiday spirit is infectious, and it’s important to make sure your urge to give doesn’t take too much of a toll on your credit score.
As an example, a heavily leveraged credit card with a balance approaching the credit limit is likely going to lower your credit scores until you can pay it down to a point where the relationship between the balance and the limit is less indicative of elevated credit risk.
Holiday debt, which is likely to be incurred on an existing credit card or a newly opened credit card, can get expensive. Interest rates on credit cards are almost always in the double digits, with some as high as 20+ percent. And while these terms are clearly disclosed on your cardholder agreement, many consumers don’t think about the cost of carrying holiday debt on plastic until they’re actually doing so.
And it’s not just the actual holiday debt that can be problematic. The process of acquiring the debt can be problematic as well, especially if you’re opening new accounts in order to do so. Credit applications cause credit inquiries and newly opened accounts to appear on your credit reports. And while a few inquiries and new accounts won’t turn a VantageScore credit score of 800 to 500, it can make a difference for already marginal applicants, as well as for those whose scores are not as strong in the first instance.
None of this is to suggest that you avoid the malls over the next few weeks. It’s simply a reminder that acquiring holiday debt can lead to changes on your credit reports that could lower your credit scores well into 2016. Your best bet is to maintain a reasonable budget that results in your ability to shop, spend, and then pay it in full when the bills arrive. That way, you enter 2016 with zero balances, and that’s a nice holiday present to yourself.