Consumer credit card spending regularly spikes at the end of the year as people cross items off of their holiday gift lists. But beware: All of that holiday shopping can take a toll on your credit score. It doesn't have to, however. A little financial planning can allow you to increase your spending without damaging your credit in the process.
Additionally, it can sometimes be a smart spending strategy to get a new credit card during the holiday shopping season, because rewards, sign-up bonuses and promotional financing offers can increase the value of spending you already planned to do.
With just about a month left before the holiday shopping season gains momentum, here's a look at a few steps you can take now to improve your credit for the short-term and keep your credit healthy in the coming months.
1. Check your credit scores
Whether your holiday spending plans involve opening up a new credit card or taking measures to protect your credit, the first thing you'll want to do is see where your credit scores stand. You can get two free credit scores on Credit.com, and, in your credit report summary, you'll see what areas of your credit are helping (or hurting) them. For instance, you may see you have a high number of credit inquiries -- a sign you may not want to apply for additional credit during the holidays. (You're also entitled to copies of each of your three credit reports for free each year from AnnualCreditReport.com.)
2. Ask for a credit limit increase
To be clear, just because people tend to charge more during the holidays doesn't mean it's a good reason to spend more than you can afford. Given the high interest rates on credit cards, a little overspending can take months to repay and cost you hundreds -- potentially thousands -- of dollars in interest.
That being said, if you've budgeted for the increase in spending and plan to put it on credit cards, you need to be careful about how high you push your credit card balances. One of the biggest factors affecting your credit scores is your credit utilization (how high your balances are relative to your credit card limits). To keep your credit scores in good shape, many experts recommend using less than 10% of your available credit.
If holiday spending is likely to increase your credit card balances (even just for a short time), you may want to consider asking your credit card issuer for a credit limit increase. That will give you room to spend a little bit more without driving your credit utilization too high. Keep in mind, a limit increase request may result in a hard inquiry on your credit report, which can ding your credit score.
3. Pay down your debt
After you've checked your credit, you may see that high loan balances or a high credit utilization rate is already hurting your scores. If that's the case, you may want to focus on paying down those balances as much as you can leading up to the holidays -- particularly if you're planning to apply for a new credit card and want to improve your scores before applying.
4. Set a budget
Part of preparing your credit for the holidays involves protecting your scores from the damage of future debt, but if you haven't made a plan for your holiday spending, you may be in danger of overspending in the next couple months. That could lead to higher credit card balances, which could hurt your credit scores.
Now is a great time to plan how much you can spend during the holidays (and how much you need to save in the coming weeks to afford that). Remember to factor in expenses like travel, gifts, social gatherings, party hosting and any other costs that you incur only around the holidays.
5. Stay the course
Sometimes, the best thing you can do for your credit scores is have patience. If your credit scores are in good shape at the moment, keep paying your bills on time, keep your credit card balances low and don't apply for new credit (until it's time to go for that 0% promotional financing offer you're planning to use). Maintain these habits through the holidays, and you may see your credit scores stay about the same or, even, improve as the months pass.