4 Ways Holiday Spending Can Damage Your Credit Score

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Key takeaways

Overspending during the holidays can wreak havoc on your credit score.
Maxed-out cards, missed payments, only paying the minimum, and too many new applications can damage your credit score.
Stick to a budget, and you can enjoy the season without falling into debt or tanking your score.

The holiday season is a time for joy and festivities. The problem is that between the presents, parties, and family activities, celebrating can be expensive. Many Americans use their credit cards to cover the extra costs. While cards can be a great financial tool, unchecked holiday spending can lead to long-term debt and a lower score.

Fortunately, it is possible to enjoy the holidays without damaging your credit. Here are four common ways the holiday shopping season can hurt your score and what you can do to prevent it.

Maxing out your credit cards

People tend to spend a lot more during the holiday season. Most consumers make these purchases with their credit cards. Cards are convenient ways to pay, but if you don’t watch out, you may max out your card.

A maxed-out card will damage your credit score. Actually you don’t want your spending to get close to your credit limit. Financial experts recommend only spending 30% or less of your limit.

How much you spend at a given time is your credit utilization rate. Your utilization makes up 35% of your FICO score and 20% of your VantageScore. Lenders consider high utilization to be a red flag that you’re overly reliant on borrowing.

To calculate your utilization, divide your credit card balance by your limit. Then, multiply the number by 100. For example, if you spend $400 and your limit is $1,000, your credit utilization ratio is 40%.

A 40% utilization rate is too high, but it’s not the end of the world. Financial institutions only report utilization at the end of your billing cycle. Pay down your balance before your issuer reports it, and you won’t hurt your score at all.

Forgetting to pay your bill

The holidays are a busy time. You have family visiting, or you’re traveling. There are parties to go to, cookies to bake, and, naturally, the gift giving. It is a whirlwind of activity, and as a result, bills can be forgotten.

Missing a payment by a day or two isn’t a big deal. Your credit card issuer will likely charge you a late fee, but they won’t report the missed payment if it’s less than 30 days late. Once you hit the 30-day late mark, your account will be considered delinquent, and your score will suffer.

Payment history accounts for 35% of your FICO score and 40% of your VantageScore. Even one late payment can do significant damage and will stay on your credit report for up to seven years.

Missed payments are avoidable. Set up automatic payments or put reminders in your calendar. Your provider may also offer to send emails or text alerts for due dates. Figure out what works for you so you remember bills during holiday festivities.

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Only making minimum payments

It can be very tempting only to make the minimum monthly payment on your credit card bill. After all, spending is up during the holiday season, as are your bills. Avoid falling into the minimum payment trap. Making minimum payments will preserve your score in the short term but can hurt it in the long run.

When you pay the minimum, your issuer charges you interest on the remaining balance. Credit card interest rates are up at 21.76% APR (annual percentage rate) at the moment, according to the Federal Reserve. This is an incredibly high APR. Accruing interest at this rate will make the balance harder and harder to pay off. You can easily slip into debt, which will damage your credit score.

The best thing you can do is pay your bill in full. This will reset your utilization to 0%, and it will be easier to stay under 30% each month.

To make this possible, only use your card for purchases you can afford to pay cash for. Your card is not free money, and treating it as such will tank your score. The exception of course if for emergency expenses – not holiday shopping.

Falling for store credit card offers

The holiday season is prime time for store credit card offers. Many stores entice holiday shoppers with discounts for opening new accounts. And you typically get approved on the spot. While some deals and discounts are worthwhile, every new account will ding your score.

New applications are 10% of your FICO score and 5% of your VantageScore. This is a small amount, but you need to be aware of it.

When you apply, the issuer will do a hard inquiry, which will cause a small temporary drop of five to ten points. Not a big deal, your score should bounce back within a year.

A more significant impact is that opening a new account will lower the average age of your credit accounts. Your credit history – how long you’ve had credit accounts – is 15% of your FICO score and 21% of your VantageScore (along with a mix of account types). A new account will make little difference if you have a long credit history. If you’re new, the impact will be more significant.

Another thing to keep in mind is that store cards typically have lower limits and higher APRs. You’ll need to keep your balances low and pay them in full to avoid interest charges and a high usage rate.

All of that isn’t to say never open a store card. These cards can be easier to be approved for and give some excellent deals. Simply consider the risks and decide if the savings are worth it.

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How not to damage your credit score over the holidays

It is possible to have a festive holiday season without negative consequences. The key is to spend smartly.

Set a holiday budget

No one likes budgeting, but this is the best thing you can do for your score and finances. Consider your income and expenses, and decide how much you can spend on the holidays. Take into account all holiday expenses: gifts, decorations, food, drink, travel, etc. Sticking to a budget ensures you don’t overspend.

Spread out your spending

Avoid making all your purchases at once. Buy a little here and a little there so that you can afford to pay your bills in full.

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Pay in cash or with a debit card

Paying in cash or with a debit card is a practical way to avoid having holiday-related expenses impact your score. Cash, especially, will help you stay on budget since it’s harder to part with than it is to swipe a card.

Make multiple payments

You can pay down your balance throughout the month. Aim to make at least two credit card payments: one in the middle of the month and one at the end. Your utilization will be much lower. Plus, you’re more likely to be able to pay off your balance in full, so you’ll save money on interest.

Keep your costs low

Look for sales and discounts to minimize expenses. Reconsider buying expensive holiday gifts that aren’t necessary. You can keep your costs low and still enjoy the festivities.

Try BNPL apps

Buy Now, Pay Later (BNPL) apps allow you to spread your payments over time without interest. You typically pay for your purchase in four installments over a few weeks. Spreading out the payments can help reduce stress and credit card debt. Make sure you can make all the payments.

Post-holiday recovery tips

The holiday season can be tough on your finances and score. Don’t panic. There are basic steps you can take to rectify the situation. Always pay your bills on time and reduce your outstanding balances. While easier said than done, these are the best things you can do. Gradually, your score will climb back up.

If you want more of a boost, take out a credit-builder loan or apply for a secured credit card. Both are tools designed to increase your score by establishing a positive payment history.

Another option is to report your rent. Lots of companies will report rent payments (and other monthly bills) to the credit bureaus. Your score gets a boost for bills you already pay on time.

There are plenty of ways to rebuild your score as you face the new year.

Frequently asked questions

1. What habits lower your credit score?

Bad habits that damage your credit score include missing payments, spending too much, and applying for new cards frequently. These actions indicate that you are high risk, too reliant on borrowing, and cannot be trusted to pay what you owe.

2. Why does my credit score go down when I make a purchase?

Making a purchase does not cause your score to drop. What it does is raise your utilization rate. A high utilization rate lowers your score and makes it harder to pay bills on time.

3. Will my credit score go down if I pay a day late?

Paying a day late won’t affect your score since most issuers only report payments that are 30 days or more overdue. You may incur a late fee and possibly a penalty APR. It’s best to make payments on time always.

4. Why did my credit score drop 50 points for no reason?

A sudden 50-point drop could result from a high utilization rate, a missed payment, or a closed account. Check your credit report to identify the exact reason for the change.

Bottom line

The holiday season is joyful, but it can be tough on your finances and credit score. The key is to spend smartly. Stick to your budget to avoid holiday debt. Keep your balances low. Only buy what you can afford to pay on time. You can still enjoy the festivities without racking up debt and damaging your credit score.

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Rachel Alulis

Rachel Alulis has been the lead editor for Moneyfor’s credit cards team since 2015 and for the financial rewards team since 2023. Before joining Moneyfor, Rachel worked at USA Today and the Des Moines Register. She then established a successful freelance writing and editing business specializing in personal finance. Rachel holds a bachelor’s degree in journalism and an MBA.