Is Holiday Spending Putting Your Credit Score at Risk?

Holiday ShoppingHistorically, consumers' credit scores fall steadily every year between December and February, according to Credit Karma. Don't hurt your credit score because you're paying off your holiday purchases in January and the first months of the new year. Keep reading ... we've got a lot of ways to raise your credit score.

The process of trying to pay our way out of the hole—or even just one late payment—can cause your credit score to take a dip. And this three-digit figure plays a big role in your family's financial future.

For one, it determines whether you'll be able to secure a loan for a car or a home, and at what type of rates. Having a bad score means worse mortgage terms and spending a lot more in the long run. (To see what we mean, test out this tool that shows you how much more a house or a car would cost you with a good score versus a bad one.)

There are many factors that determine your total score, from your payment history to how many credit inquiries you've had. To help you figure out how your holiday actions now might help or hurt your credit score later, we've made a convenient chart.

Here's what you can do (and not do!) to maintain your flawless credit score over the next few weeks:

ActionGood or Bad?Factor It AffectsImpact on Your ScoreNotes
Opening a store credit cardBadCredit Utilization Rate, Length of Credit History, Amount of New CreditMediumAside from high APRs, opening a store card will trigger a hard inquiry and shorten the average length of your credit history.
Maxing out your card to pay for giftsBadCredit Utilization RateHighUsing too much of your available credit makes you appear financially unstable to credit rating agencies. Try to limit yourself to only 30% of your available credit.
Putting a big purchase on layawayGoodCredit Utilization Rate, Payment HistoryHighUsing layaway means you won't use too much of your available credit at once. You'll face fees for late payment (so, of course, you should pay on time), but at least your credit score won't suffer.
Getting caught up in the holiday excitement and falling behind on credit card paymentsBadPayment HistoryHighHaving a stable payment history shows creditors that you're trustworthy enough to borrow money from them, and even one late payment can hurt your credit score.
Closing all of your credit cards at once as your New Year's resolutionBadLength of Credit History, Credit Utilization RateVery HighWhen you close a card, the history of that card ceases to affect your score. Having less available credit will also hurt your credit utilization ratio.
Using an in-house financing plan for a big purchaseBadTypes of CreditHighIn-house financing plans for large purchases (like furniture) are loans from the seller. It's another type of credit, but one that's considered a negative "last resort."
Requesting a credit limit increase to pay for giftsBadCredit Utilization Rate, Amount of New CreditHighWhile requesting a credit increase isn't always bad, it will lead to a credit inquiry in the short term. And, it sounds to us like you might be spending more than you have, which can hurt your payment history.
Taking on student loans for your New Year's resolution to go back to schoolGoodTypes of CreditMediumStudent loans actually diversify your credit lines and let you prove how adept you are with money. That said, aim not to take out more than your predicted first-year post-grad salary.

The Factors

Companies put the information in your credit report through a complex mathematical formula, and boom, out comes your credit score. These are the factors they use:

Payment History: It's exactly what it sounds like—have you been paying your bills? Creditors look at your history to determine whether or not they trust you to pay off your loans. It affects your credit score more than any other factor; it's about 35% of the equation.

Credit Utilization Rate: Your credit utilization rate (CUR) shows what percent you are using of your available credit. If you have credit, you should use it regularly even if you don't need to, to keep it active. That said, it’s best to use less than 30% of your total credit limit, because it shows that you know how to use credit and pay it off. This ratio of how much credit you're using to how much credit you could use accounts for about 30% of your credit score, combined with factors like student loans and mortgage debt.

Length of History: This shows how long your accounts have been open and how long it’s been since there was activity in them. Note that this is an average of your credit lengths, so opening a new card actually lowers your total length. This is also the reason you should try never to close your oldest credit card. Length of history accounts for about 15% of your credit score.

Amount of New Credit: This tallies what percent of your accounts have been recently opened and how many inquiries were recently made on your credit. It's weighted at about 10% of your total score.

Types of Credit: It is better to have varied types of credit, such as credit cards and student loans ... but you're looking to diversify into "good" types of debt, like student loans or a mortgage. By contrast, "last resort" loans, while diversifying your credit lines, can actually hurt your score. This factor counts for about 10% of the credit score equation.

Still looking for tips? Make sure you check out "dos" and"don'ts" to raise your credit score.