A Credit Insider’s Tips for Smart Holiday Spending

The holiday shopping season is now in full swing. Malls and other retail outlets have their decorations up and holiday music playing, enticing us all to shop for our friends and family. And as inevitable as hearing “Frosty the Snowman” is the chorus of checkout clerks asking shoppers if they’d like to open store credit cards to get a discount on their holiday hauls. Sometimes the savings are quite enticing, and depending on personal financial circumstances, they can be a good option. However, there are some issues to consider before signing on the dotted line.

To help you avoid a possible post-holiday shopping blunder, we’ve compiled some tips to help you make the right credit decisions this holiday season:

1) Before Opening a Retail Store Credit Card, Assess Your Ability to Make Payments

Many consumers take advantage of retailers’ discount offers in exchange for signing up for store credit cards. While these credit cards might be entirely appropriate for some consumers, a risk with any new credit account is that it can put pressure on your ability to make on-time payments on that account and others. Know what the interest rates will be on the new card and be sure the payment schedule is manageable. Don’t forget that missing even one payment can have a significant negative impact on your credit score. Depending upon your current credit score, a missed payment can cause your VantageScore credit score to drop 60 to 90 points, and it can take a year and a half to recover fully. (The VantageScore model’s range is 501 – 990.)

2) Be Careful of Credit Inquiries

When you open a retail store credit card, or almost any credit card for that matter, the card issuer typically makes a credit inquiry in order to predict the likelihood that you may miss payments and default, which would result in a loss for the issuer. Credit inquiries are usually recorded by the three national credit reporting companies (Equifax, Experian, and TransUnion) (“CRCs”) in your credit files and credit scoring models will likely consider them when determining your credit score.

Generally speaking, a credit inquiry will cause your VantageScore credit score to drop by between 10 and 20 points, but as you will see, this drop can be recovered relatively quickly in as little as three months.

3) Opening an Account Also Impacts Your Score

In addition, when you actually open a new credit card account, another report is usually made to the three national credit reporting companies. This information also can factor into your credit score. Opening an account can cause your VantageScore credit score to drop an additional five points.

4) Score Drops Can Usually be Made up Quickly

Your credit card payments are usually reported to the CRCs. Once on-time payments are reported, as long as you don’t have an unusually high credit card balance (i.e., no more than 30 percent of the maximum credit balance is recommended), your credit score likely will recover fully from the decrease associated with opening a new account within three months after opening up a credit card account. Regardless, if you plan to finance another large item on your holiday list like a car, a minor score decrease can significantly impact your ability to get credit at the best terms available.

5) Be Careful When Closing the Account

Some consumers take advantage of the discounts offered as incentives for opening retail credit cards with the idea that they will close the account after the holiday season. This might be a good idea for you, but it will also likely have a negative impact on your credit score.

Closing a credit card account can decrease your VantageScore credit score by 10 to 25 points if you have a very good credit profile (i.e., a score above 900 on the VantageScore scale). The impact can be greater to those with higher risk credit profiles (i.e., scores lower than 760 on the VantageScore scale) and can reduce your VantageScore credit score by 15 to 30 points. This is because the account closure reduces the amount of credit to which a consumer has immediate access.

6) Pay Off Debts Quickly

Pay off this debt as soon as possible early next year. Don’t borrow more than you can repay in several months. Remember that credit card debt is relatively expensive. If you only make the required minimum monthly payment, you might extend that debt for years to come.

7) Educate Yourself About Credit and Credit Scoring

It’s important to spend time learning about how credit and credit scoring works. Read articles and talk about it with friends and family. In fact, before putting any more mileage on your credit cards this holiday season, you can check your credit scoring IQ using the Credit Score Quiz, which was created by VantageScore Solutions and Consumer Federation of America. Make it a priority to understand how your credit score works, and most importantly, incorporate what you learn into your everyday life to keep yourself credit-healthy — not only through this holiday season, but all year round.

Image: Steve Cyr, via Flickr