It’s no secret that Americans spend a lot during the winter holidays. In fact, the average American expects to spend $633 on Christmas in 2018. This is partly due to all the holiday specials and sales and partly due to the fact that more happiness comes from giving than receiving or even earning something. Gift-giving is great; however, the sales and holiday spirit can oftentimes entice us to overspend.
In the U.S. households add over $900 in debt on average during the holidays and most people will take over 5 months to pay it off. In a report by lendedu.com, 22% of respondents are expecting to take on debt due to Christmas shopping; over $500 worth of debt.
Buying gifts for friends and loved ones is great, until it leads to financial problems, resulting in terrible credit. One of the easiest ways to damage your credit is by overspending or maxing out credit cards.
How Credit Card Debt Can Impact Your Credit Score
It’s not uncommon, while shopping for Black Friday deals or Christmas shopping, that consumers tend to use credit cards. Many of us will reason with ourselves that it’s worth it because we’re getting such a great deal and, by extension, saving a lot of money. So we max out our credit cards on purchases we can’t afford because if we don’t we’ll lose out on these great deals which only come once a year.
Unfortunately, credit cards can have a major impact on our credit scores, causing financial distress down the road. Since credit cards aren’t tied to any assets, they usually come with high interest rates, fees, overage charges, and more. This can lead to unexpected problems later in the year and could also make them difficult to pay off. This can lead to any of the following:
- Maxed out cards
- Late payments
- Delinquencies
- High debt-to-limit ratio
- And poor credit history
All of these things can seriously damage your credit score, causing it to drop over 100 points. They can also lead to higher interest rates which just make it even harder to get out of that debt. Once your credit score drops, any loans, mortgages, credit cards, or other lines of credit you open later on will have a much higher interest rate, assuming you are even approved.
Watching Your Spending During the Holidays
As mentioned previously, giving gifts is great and we don’t all have the talents needed to craft our own gifts from scratch, so we have to spend money to purchase them. Ideally, though, you’ll want to make sure that you just don’t overspend and hurt your credit. One of the best ways to do this is by simply budgeting out how much you can afford to spend and only bringing cash with you when shopping. This can help prevent you from spending more than you expected due to impulse buys.
If you do use a credit card for your holiday shopping, make sure that you maintain a safe debt-to-limit ratio. The debt-to-credit limit ratio is the amount that you owe on your credit card compared to what your credit limit is. For instance, if your credit limit is $1,000 and your balance is $500, then you are at a 50% ratio. The ideal ratio to have for improved credit is 30%, however, you can usually get up to 50% without negatively impacting your credit score.
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If you are in need of credit counseling or want to improve your credit score, contact us today by calling (480) 478-4304
