How to Avoid Turning a Credit Limit Increase into a Holiday Debt Hangover
The holiday season is at its peak and research firm RetailNext predicts that December 23 will be the biggest shopping day of the year. For many shoppers, a credit card will be the payment of choice. Americans opened 500,000 new store card accounts on Black Friday alone.
Opening a store credit card, even to enjoy a discount off your first purchase or to take advantage of 0% APR financing, can backfire in more ways than one. Not only do these cards tend to carry higher regular purchase APRs than traditional credit cards but owning one could encourage you to spend more than you normally would (and possibly, more than you can afford).
Credit Sesame took a closer look at store credit card trends and how they could affect your holiday spending habits. The average store card credit limit increased over the last two quarters. Average balances have also increased.
Let’s take a closer look at the numbers, followed by tips for keeping your credit utilization in check over the holidays and beyond.
Where are the biggest increases?
Credit Sesame analyzed balance and limit data for three specific categories of credit cards: bank cards, department store cards and Target cards.
In the second quarter of 2016, bank card limits declined by 1% on average, while department store card limits saw an increase of 10%. Over that same period, Target card holders received a 6% average credit limit increase. In the third quarter of 2016, bank card limits increased by 1% on average, while department store card limits and Target card limits jumped by 11% and 7%, respectively.
That’s a significant change over the same time period in 2015. In 2015 Q3, bank card limits increased by an average of 1%, while store card limits decreased by 1% and Target store card limits increased by less than half a percent.
In Q2 2016, we see no major jumps for bank or store card balances. In fact, the average balance for both fell by 4%. Target card users, on the other hand, increased their balances by an average of 11%.
In Q3 2016, shoppers start to cash in on the additional available credit. The average balance for bank credit cards rose by 6%, while department store card balances increased by 11%. Target card average balances saw the biggest increase, spiking by 21%.
Do higher credit limits lead to higher balances?
At first glance, the data suggest that more available credit could cause shoppers to charge more to their cards. People certainly charge more in the third quarter, presumably in anticipation of the holidays.
The fact that credit card limits increased over the same time frame is very likely a strategic move on the part of credit card issuers, but also reflects creditworthiness overall (the bank is not likely to increase the credit limit for consumers with poor credit habits).
According to the New York Federal Reserve, total credit card debt in the U.S. increased by 2.5% in Q3 2016, topping $747 billion. In fact, every type of non-housing debt—including student loans and car loans—rose between July and September of 2016. The aggregate credit card limit increased for the 15th consecutive quarter.
On par with the national averages, Credit Sesame’s credit card data for 2015 shows that limits and balances rose in 2016. The takeaway: Americans have more available credit and are using it.
Tips for managing your credit utilization over the holidays and into the New Year
Running up credit card debt over the holidays or at any of time of year can hurt you in more ways than one. First and foremost, if you don’t pay your balance in full right away, you risk paying expensive finance charges. A card with a 0% introductory APR for purchases can cut down on the cost but only if you pay it off before the promotional interest period ends.
Note that many store cards offer deferred interest promotions. That means that if you don’t pay the entire balance off before the promotional period ends, you’ll be charged interest on the entire amount, from the date of purchase. On a straightforward zero percent offer, you will only pay interest on the balance you carry after the promotional period ends, so some savings are still possible.
Another potential downside involves your credit score. Approximately 30% of your FICO credit score is based on your credit utilization. Higher credit limits can work in your favor only if you keep your balances proportionately low. The higher your balances, the more harm to your score.
A lower credit score could stand in the way of your financial goals or increase their cost.
Control your credit utilization over the holidays to minimize any negative impact to your score. Here’s what you can do.
Know your limits. Healthy credit utilization starts with knowing your credit limits and balances for each card. If you open a new bank or store card, crunch the numbers to figure out how much you can charge before you hit 30% of your limit, and keep your spending below that amount. If you need to charge more than that, pay the bill before the statement closing date (well before payment due date).
Set up balance alerts to track spending. It’s easy to lose track of spending during the holiday rush. Set up text or email alerts to keep tabs.
Request a credit line increase. Paying down balances is not the only way to lower your credit utilization. You can also ask your credit card issuer to increase your available credit. Two things to remember: (1) this will usually result in a hard inquiry on your credit report; (2) your utilization only goes down if you avoid adding to your balance after the limit is increased.
Open new store cards carefully. Consider the benefits strategically before you sign on the application’s dotted line. Be sure the new card fits within a responsible spending plan. Also, be mindful of the number of inquiries you allow on your credit report. Each inquiry is likely to hurt your credit in the short term. Too many inquiries could lead future creditors to reject your application. Some creditors, for example, will automatically reject your application if you have more than two inquiries in the last six months or three in the last year.
Pay early. Waiting until the due date to make a payment to your store credit cards may simplify your life financially but it also causes maximum damage to your credit utilization ratio. Balances are reported on or right after your statement closing date; payments are due about three weeks later. If you pay your bill before the balance is reported, or in portions at multiple times during the month, your credit utilization will be reported at its lowest.
Your credit utilization significantly impacts your credit health and score, no matter how high or low your limits are. Don’t fall for temptation when more credit is made available to you. The folks with the highest credit scores have available credit but leave it unused.
To find out how your spending patterns may be affecting your score, get your free credit report card from Credit Sesame today.