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Top Five Ways to Protect Your Credit and Finances This Holiday Season

We’re just a few days away from Black Friday, a time when people seem to lose their minds and try their best to outspend the first 47 weeks of the year. This year will be no different as we’re projected to outspend last year’s holiday season. Still, there are ways to spend your hard earned money without trashing your credit scores or your savings accounts. Here are my top five recommendations on how to protect your credit and finances during the holiday shopping season this year.

1. Avoid Opening New Retail Store Credit Cards

This is a credit and finance protection strategy. Opening a new retail store card can cost you in the short-term, and in the long run. First off, applying for retail cards can lower your credit scores because of the credit inquiry and the reporting of the newly opened card. Further, retail store credit cards often have very low credit limits, which means even modest balances can harm your credit scores. Finally, retail store credit cards generally have interest rates in the mid-to-high 20s, even if you have good credit. That means you’ll give back any money you saved at the register when opening the account if you carry a balance even for just a few months. The solution is to use a card that’s already in your wallet and be done with it.

2. Use Credit Over Debit and Cash

If you haven’t been following the news over the past 12 months, you missed reports of at least six high profile data breaches involving companies with whom you’ve likely done business – including Target, Michaels, Chase, eBay, Home Depot and St. Joseph Health System. Personal identification, email addresses and payment information has been exposed to fraudsters. That’s the bad news. The good news is that if your credit card number was among the information stolen, you can sleep well knowing that you’ll never ever have to pay a dime for unauthorized charges. First, any money stolen belongs to a bank, not to you. Second, the Fair Credit Billing Act caps your liability to no more than $50 for credit card fraud, and the credit card networks all have zero fraud liability policies so, really, you’re liability is capped at $0. You can’t say the same if your debit card information, prepaid debit card information or cash is stolen.

3. Don’t Spend More Than You Can Pay in Full…by January

According to Deloitte’s annual holiday sales forecast, we’re going to spend 4 to 4.5 percent more on gifts this year than last year. What that means for each of us is going to vary, of course, on how much we spent last year. What you should shoot for is to spend an amount lower than you can comfortably pay off by the due date of your December statement, which will likely be sometime around January 21st. This not only localizes any damage to your credit scores to one month, but it also means no interest accruing debt caused by holiday shopping.

4. Check Your Credit Reports Before December 31st

Despite the fact that hundreds of millions of credit reports can be claimed, for free — thanks to both federal and state laws— only a small fraction of them actually end up in the hands of consumers. There are simply too many places where you can get a free credit report and credit score, such as the free report and score you can claim at CreditSesame.com, so there’s no excuse not to do so. You’re likely going to read multiple “New Year’s Resolution” articles that direct you to improve your credit scores. Let me beat them to the punch by telling you that you cannot improve your credit scores without first knowing what’s on your credit reports.

5. Use Your Credit Card With the Highest Limit for Holiday Shopping

This is a credit score protection strategy. Credit scoring models like to see balances that don’t eat up too much of the credit limit. The ratio is called “revolving utilization” and can be calculated by dividing the balance by the credit limit. If you spend $1,000 this holiday season on a card with a $1,500 credit limit, you’ll damage your credit score because you will have utilized 67 percent of the card’s limit. However, if you spend the same amount on a card with a $20,000 limit, then you’ll be using a benign five percent of the card’s limit. It’s strategic shopping at its best.

Check out this fun holiday infographic for a visual understanding:

11.12.02_CrediCardMaze-1.png

More on Credit Scores from Credit Expert, John Ulzheimer:

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