Holiday Tips for New Year’s Credit Health

By Guest Blogger Shon Dellinger

Ah, the holidays. A time for generosity, tidings of joy… and lots of spending. In these last days of holiday shopping, ask yourself if these actions apply to you. If they do, it could be affecting your credit score:

Number One: Use of store credit cards. Store credit cards can be enticing – 20% off here, $100 off there. In fact, the New York Times just wrote a lengthy story detailing the in’s and out’s of store credit cards. But buyer beware – they can have sky-high interest rates, and, opening any new line of credit will almost certainly lower your FICO score immediately. To make matters worse, many of these credit cards have very low credit limits – $500 in some cases. If you spend even as little as $250, this will change your utilization rate – or the ratio of outstanding balances to your credit limit – which should be kept as low as possible (usually 30% utilization is recommended). The lower your utilization, the better your score will be.

Say you open a store card with a credit limit of $500 and you spend $250 on pajamas and t-shirts for Jimmy and Janelle: that card would right away have a 50% utilization rate, which could impact your score. Cardholders can also understand the factors that affect their credit score and learn how to improve it using the FICO simulator tool to make sure they are spending responsibly.

Second issue: closing a card. As we get ready for the New Year, we think more about New Year’s resolutions, and, inevitably, finances. A recent FICO survey found that 40% of Americans see credit card debt as their biggest worry heading into 2010. Although it’s great that we all are being a little more careful this year — the survey also found that three out of four consumers are planning to reduce or not use credit this year to pay for holiday gifts and expenses – we could see a push among consumers to close secondary credit accounts, which is another way to change their proportion of available credit and hurt their credit score. Consider this:

Say you have 3 credit cards. Credit card 1 has a $500 balance and a $2000 credit limit. Credit card 2 is an unused card with a zero balance and a $3000 limit. Credit card 3 has a $1,500 balance and a $1,500 limit. In this scenario your credit utilization ratio looks like this:

•    Total balances = $2,000 ($500 + $1,500)
•    Total available credit = $6,500 ($2,000 + $3,000 + $1,500)
•    Credit utilization ratio = 30% (2,000 divided by 6,500)

Now, if you decide to close credit card 2 because it's an old card that you never use, your credit utilization ratio looks like this:

•    Total balances = $2,000 ($500 + $1,500)
•    Total available credit = $3,500 ($2,000 + $1,500)
•    Credit utilization ratio = 57% (2,000 divided by 3,500)

You can see that your utilization ratio rose from 30% to 57% by closing the unused credit card. If you’re paying bills and get your finances in order before the holidays and want to see what will happen to your score if you close that unwanted credit card, FICO’s cheap credit simulator that I mentioned before can help with this, too, that can tell you the estimated range your score will change based on certain actions. Go to – and better yet – enter MYFICO HOLIDAY and get 30% off.

For additional tips on this topic check out the myFICO forum: