*This article was originally published on 11/26/2015. It has been updated to reflect current dates and market conditions.
The holidays are here and, ready or not, it’s time to start preparing. While it’s great to get caught up in the joy of the holiday season, it’s important to think ahead to the New Year. Have you set any financial goals? Do you plan to buy or refinance a home? If you have big plans for 2017, you'll want to avoid some common holiday spending mistakes. After all, you don’t want to overindulge to the extent that your financial plans for the New Year go up in flames!
Fortunately, we have some expert advice regarding some fairly common holiday spending behaviors that can do a number on your credit score. Here’s what the experts say you need to avoid.
1. Maxing out your credit cards.
According to the National Retail Federation, nearly 40% of shoppers are planning on using their credit cards to purchase Christmas gifts this year. And while many credit card holders pay off their bills in full, too much Christmas cheer can do a lot of damage when you put all of it on those cards- especially if you have your sights set on buying a new home.
When you are thinking of buying a home (and if you are, you may want to download our exclusive buyer's guide!), the goal is to get your credit score as high as possible. Though it may be convenient for shoppers, all the “stuff” that is accumulated on credit cards could cost more than you bargained for in the long run. Besides creating months of payments, and excess interest if not paid in full, maxing out a credit card can be a killer to a credit report. In fact, getting anywhere near your credit limit is a bad idea. If you’re actively trying to raise your score, you should aim for as little as 10% of your credit card limit and as much as 30%.
2. Charging up a low-limit credit card.
The truth about credit cards in relation to credit scores is that the closer your balance is to your credit limit, the lower your credit scores. For example, if you charge $1,000 on a card with a $1,500 limit, that looks much worse than putting the same amount on a card with a $10,000 limit. Even though the amount you’re spending and the total amount of credit you have available hasn’t changed, the fact that you are over that recommended maximum of 30% can cause a decline in your credit score. And you will need that solid credit score for a mortgage approval (and to get the best rates).
Even more important to remember, is that if you plan on paying off your holiday purchases over several months, this harmfully high ratio on the card will continue to show on credit reports.
3. Opening a ton of store cards.
Of course, it’s enticing to get 10% or 15% off for opening a new card at your favorite holiday shopping destinations, but opening a slew of store credit cards is still a bad idea. Here’s why: a new credit card will show up as an inquiry on your credit report. Every time you apply for credit, no matter how small, an inquiry shows up and your score takes a (small) hit. In fact, each inquiry can temporarily send your credit score diving by five or ten points. So if you’re bordering a credit score or 760, 700, or 680, it’s best to avoid opening any new credit accounts for about 6 months before a mortgage.
4. Financing a major purchase.
It’s the holidays and you want to surprise your wife… or daughter… or mother, so it’s okay to purchase a large gift and finance it, right? Wrong. Buying big-ticket items such as a car, or a trip, or jewelry on credit will only put you further in debt and will affect your credit score. To get your mortgage approved, it’s imperative to avoid making any large purchases; save these purchases for after you have bought your home! In the meantime, set your budget goals for next year and make a plan to buy those fantastic gifts next year- or at least until after your mortgage has funded.
5. Shopping Online at Unsecured Websites
With endless online shopping options at the tips of our fingers, it’s easy to get sucked into the world wide web, looking more for what we want than where we find it. As a general rule of thumb, when shopping online, it's best to stick to big-name retailers or companies and stores you know and trust.
Because it has become so easy for hackers to gain access to your payment information, it is more important than ever to only provide this information on secure sites. Even with nationally known retailers, anytime you use your credit card for a holiday purchase, double-check that the URL (address) of the website starts with "https" and not just "http." The letter "s" lets you know it's a secure site. Alternatively, check for a lock symbol next to the URL, which also lets you know your transaction is secure. Worst case scenario? Your payment info is hacked into, your credit card is maxed out by someone across the globe, and your credit score plummets.
6. Missing a Payment
We all want some extra cash during the holidays, but whatever you do, DO NOT borrow that extra cash from your credit card payment budget! Late or delinquent payments are one of the worst credit mistakes you can make. In fact, being 30 days late and missing a single payment on a credit card can drop your credit score by 50 to 100 points. That said, you never want to exceed your holiday budget to the extent that you are unable to pay your bills on time. From a financial standpoint, enjoy the holidays as much as you can, but use your credit cards responsibly and make all essential payments on time.
7. Taking out a Payday Loan
Though it seems like a great plan B to get some extra holiday cash by obtaining a Payday Loan, you will definitely want to think again. Already highly controversial because of their impossibly high-interest rates, a payday loan could harm your chances of becoming a homeowner. Many banks and lenders believe regular use of payday loans may suggest you are either financially stretched or unable to manage your finances.
8. Spending your savings
You’ve worked hard to save up for your new home, and you think that taking a little money out of that may be a good alternative to racking up credit card debt. Not so fast. While you definitely should not rack up credit card debt, it is just as important to refrain from spending your savings! Whereas you may be saving for the down payment on a home, there are more costs involved with buying a home than just that. You will likely be responsible for closing costs, a home inspection, moving costs, and more. If you dip into your savings in an effort to create a larger holiday spending budget, you’re setting yourself up for some financial disappointment down the road. Save yourself some stress and make a holiday budget that doesn’t involve using your home savings.
9. Regularly overdrawing bank accounts
Even the most responsible budgeters can have an overdrawn bank account from time to time, especially during times like the holidays which can have an abundance of money coming out of the bank in such a short amount of time. While overdrawing every once in a while can be overlooked by lenders, cases where your bank statements show a chronic number of overdrafts can greatly jeopardize your chances of getting a mortgage.
Lenders always ask mortgage applicants to supply past bank statements for documentation, sometimes asking for up to six months of statements. Any overdrafts will show on these statements. Evidence of chronic overdrafts could be a sign of insufficient income or inability to manage your money. If a lender finds this evidence while combing through your banking history, they may decide to decline your application.
Opening up a bunch of new credit accounts, having too many credit inquiries, running up high balances on your revolving credit accounts, and paying credit cards late could put a major damper on your 2016 plans, especially if you are planning on buying a home. “Communication is the key before making a big purchase or charging your cards with more than you can pay off before purchasing and/or refinancing your home”, reminds Jeff Hamilton, Senior Branch Manager of Gold Financial Services*, a trusted San Antonio lender.
This year, make sure you have a set budget for holiday shopping and know exactly how you will pay for it, then stick to your plans. “Getting pre-approved now and telling your lender what you’re purchasing for family and friends over the holiday is your safest bet to enjoy all of what the holidays mean to you and your family”, adds Hamilton. In doing so, there is more of a likelihood of your lender approving your loan. And with a loan approval, you’ll be that much closer to getting the keys to your dream home.
Not sure where to start in the homebuying process? Whether you’re a first-time homebuyer or seasoned pro, our exclusive Guide to Buying a Home in San Antonio is designed to help you make your home buying experience as smooth as possible.