Holiday Credit Tip Sheet
Credit Cards and Credit Card Utilization
One of the primary factors that go into computing your credit score is “Credit Card Utilization.”
In its simplest terms, credit utilization is a fraction. The amount of credit that you have available to you on credit cards is the bottom half (or denominator) of that fraction. The amount of credit that you have used is the top half (or the numerator) of that same fraction.
For example, if you have $1,000.00 dollars worth of credit available to you and you charge $500.00 on the credit card or cards that you own, your resulting credit utilization rate is 500/1,000, or 50%.
If you don’t pay any portion of that 50% off when your bill comes after the holidays, your credit utilization rate will be computed by the credit bureaus at that 50% rate. That level of utilization will damage your potential score. Not as bad as 75% utilization or 100% utilization, but it will leave significant credit scoring “points” on the table.
We want to help you build your score. If you’re hoping to get your score to a place where you can pre-qualify for a mortgage in the spring or summer-it is best that you spend only at a level that will allow you to pay your credit card bill down to 30% (or less) of its applicable limit BEFORE it is due next month.
In-Store Credit Card Offers
If you make a purchase at a national retail store like Target or Macy’s during the holiday season, it is likely that you will be offered a discount on your purchase if you apply for and use that store’s credit card when you checkout. The offer is typically something like a 10% or 20% discount on all purchases made on the day that you make the credit card application.
Offers like this can be very tempting. (That’s why the stores make them!)
But, think about the following:
- Research has shown that people tend to spend more money when they use credit cards in lieu of cash. The spending likely increases even more if you are given a “one day only”, limited time discount. If the 10% discount only applies to purchases made that day, you are very likely going to spend more money on that trip to the store than you had initially planned to.
- When you apply for a store card, it will show up as a “hard” inquiry on your credit report. Although the hit to your credit score will not be massive, you could potentially lose five or ten points. If you are planning on applying for a mortgage or auto loan in the next few months, those points could cost you a significant amount of money.
If you find yourself unable to resist the urge to apply for and use the store card, it bears repeating: be sure to pay the statement balance in full and on time BEFORE it is due. At the very least, pay the balance down to no more than 30% of the available balance.
- Interest rates on store cards are high, often in the range of 20 to 25 percent. Surprisingly with these cards no matter what your credit score is whether it is 620 or 850, you will receive that same high-interest rate.
If you use the credit card to finance a big purchase, the cost associated with that high-interest rate would quickly eliminate any savings you received if you don’t pay the bill off in full upon its arrival. Finally, if you don’t pay all or most of that big purchase off before the interest becomes due, that high-interest rate can result in your credit utilization moving upwards very quickly, even if you don’t spend anymore using the card.
“0% Interest” Offers Oftentimes Aren’t Really 0%
When you are ready to buy something in a store, or online, you might be tempted with an offer of 0% financing. Pay close attention to exactly what you are being offered. Not all 0% offers are the same.
Sometimes the offer will “waive” the interest during a certain, set promotional period (for example, “90 days”).
Other times the offer does not waive the interest, but defers it, instead. If you fail to pay the balance in full during the defined time, the retailer may retroactively charge you interest for that full period. In that instance, you never received the benefit of 0% interest at all. You should only consider utilizing this type of offer if you can pay the balance in full BEFORE the expiration of the defined period.
Before signing up for any of these sorts of offers, “READ THE AGREEMENT”, make sure you understand whether the interest is being “waived” or “deferred.”
If At All Possible, Avoid Going Into Debt to Buy Gifts
It feels great to give gifts to the ones who you love during the holiday season. But, if your goal in the next several months is to grow your credit score to a point where you can qualify for financing for a new home, going into debt to buy those gifts can expose your credit score to damage and jeopardize the fulfillment of that dream.
Rather than going into debt, consider gifting alternatives. Everyone loves the gift of home-baked Christmas cookies. Think about giving the gift of your labor or of a special talent that you might be able to offer to others.
Feel free to share with your loved ones that your special gift to them is helping you to realize your dream of owning a home next year.
Consider Giving Your Friends or Loved Ones the Gift of a Credit Restoration Expert in 2018
You may want to consider giving the gift of the services of a professional, reputable credit restoration company to help your friends or family along the path to better credit.
They may attempt to fix damaged credit issues on their own, but the process can be hard work. It will require their time, patience, diligence and perhaps some aptitude for understanding what the credit bureaus and collection agencies are required by law to do.
Should you choose to give this gift, we would like to chip in. Anyone who contacts Phoenix this month or in January of 2018 (314-429-2040) and tells us that they found out about us through this Holiday Credit Tip Sheet will receive a $25.00 dollar discount on their initial first work fee, should they choose to engage our services. Feel free to tell folks that this discount it is your gift to them!