How the Holidays Can Affect Your Credit Score

The holiday season brings increased financial activity, making it important to understand how spending habits influence credit standing. A credit score reflects financial responsibility, impacting access to loans, credit cards, and housing. Navigating holiday financial pressures with awareness of credit implications helps maintain a healthy financial profile.

Increased Credit Utilization

Credit utilization, the percentage of available credit in use, impacts a credit score. This metric is calculated by dividing total credit card balances by the total available credit limit across all revolving accounts. High credit utilization suggests a greater reliance on borrowed funds, which lenders view unfavorably. FICO scores consider amounts owed, including credit utilization, as 30% of the overall score.

Holiday shopping often leads to higher credit card balances, increasing this utilization ratio. Maintaining a ratio below 30% is recommended for a positive credit standing, as exceeding this threshold negatively affects scores. Credit card issuers report account activity, including balances and payment history, to credit bureaus at the end of each billing cycle. Increased holiday spending can quickly reflect higher utilization on credit reports, potentially reducing your score if balances are not promptly reduced.

New Credit Applications

Applying for new credit, such as store-specific credit cards promoted during the holidays, results in a “hard inquiry” on a credit report. A hard inquiry occurs when a lender accesses a credit file to assess creditworthiness. While a single hard inquiry causes only a small, temporary dip in a credit score, multiple inquiries in a short timeframe can have a more noticeable impact.

Hard inquiries can remain on a credit report for up to two years, though their influence diminishes after 12 months. Opening new accounts can affect the average age of accounts. Since the length of credit history contributes approximately 15% to a FICO score, a sudden influx of new, young accounts can reduce this average, potentially lowering the score, particularly for those with a limited credit history.

Maintaining Payment Discipline

Payment history is the most influential factor in credit scoring, often accounting for 35% of a FICO score. Consistently making all credit payments on time is important for building and maintaining a strong credit profile. Even a single payment reported as 30 days late can harm a credit score, with the negative impact increasing the further past due an account becomes.

Late payments can remain on a credit report for up to seven years from the original delinquency date, although their impact lessens over time. While making only the minimum payment keeps an account current and avoids a late payment mark, it does not reduce the principal balance as quickly as larger payments. Paying more than the minimum, or the full balance, helps reduce total debt and can improve credit utilization, contributing to credit health.