School is about to start for countless millions of children and young adults. And while you’re probably more focused on the scores your young ones will earn on pop quizzes and exams, you shouldn’t ignore the impact your shopping can have on your own scores—credit scores, that is. A little strategic shopping will help to ensure that your credit scores stay on the Dean’s List rather than placing you on academic probation.
There’s no getting around it; you’re likely to use credit cards for school supplies and clothes. This is perfectly fine, as credit cards provide portable buying capacity and offer aggressive protections against consumer fraud. Just remember that your shopping activity will be reflected as card balance(s) that are reported to the three credit reporting agencies.
As with almost everything else account-related that ends up on your credit reports, those balances are considered by credit scoring systems, and have some influence over your credit score, that three-digit number used by lenders to make decisions about your credit-related applications. For many shoppers, back-to-school season means larger-than-normal balances on credit cards. This can lower your credit score even if you’ve never missed a payment in your life, because utilization on the credit line has increased.
One of the most important factors in your credit score is the proportion of your credit card balances to each card’s respective credit limits. This is the so-called “debt-to-limit” ratio, and it’s calculated by dividing your credit card balance for each account by that card’s credit limits. These ratios are considered “highly influential” in your VantageScore credit score, and you’d do well to keep them as low as possible. A good rule of thumb is to keep your balance at no more than 30% of the card’s credit limit.
And while back-to-school shopping can lead to an unwanted spike in your debt-to-limit ratio, there are a few ways to minimize or eliminate any credit score impact. First, you could pay off your credit card, in full, by the due date. This will limit any negative impact to your credit score to no more than the one month your credit reports showed the large balance. Still, there are ways to do even better.
You could use a credit card that has a high credit limit for your back-to-school shopping. If your limit is high enough, the balance might be immaterial to your credit scores. For example, let’s say you spent $1,000 on school supplies and clothes. If you used a credit card with a $1,500 credit limit, then that card would be 66 percent “utilized,” which is not good. But if you used a credit card that had a $10,000 credit limit, then the same expenditure would equal just a low 10 percent balance-to-limit ratio. Same purchases, very different credit score impact. Using a card that has an even higher limit would further insulate your credit score from potential damage. (This comparison assumes your purchases are made on cards with zero balances. Of course, if you’re adding to an existing balance, you need to keep an eye on the total amount of debt you’re carrying on each account.)
Those are both great ways to protect your credit scores from balance spikes. Put them into practice as you do your back-to-school shopping, and you’ll minimize the impact on your credit score.