The holidays bring joy, celebration, and often, financial stress. With 28% of credit card users still grappling with debt from last year’s holiday spending, many people are facing a harsh reality as they try to balance their budgets and pay off lingering balances. For those who are in this situation, it’s important to understand how holiday debt impacts your financial health, particularly your credit score, and what steps you can take to regain control.
The Holiday Spending Hangover
The holiday season often means overspending. Between gifts, travel, decorations, and festive meals, it’s easy to rack up credit card debt quickly. For many, the joy of holiday shopping is soon followed by the anxiety of paying off the bills that come due in January and February. The 28% of credit card users still carrying last year’s holiday debt are a reminder of how hard it can be to recover from overspending, especially if the debt isn’t managed effectively.
In fact, according to the National Retail Federation, Americans spend an average of $1,000 or more during the holiday season. That’s a significant amount of money to charge to a credit card, particularly when paired with high interest rates. As a result, many consumers can find themselves paying off holiday debt for several months, sometimes even into the next holiday season.
The Impact of Holiday Debt on Your Credit Score
Your credit score is a key measure of your financial health, influencing everything from loan approvals to interest rates. Unfortunately, holiday debt can have a lasting negative effect on your score if not managed properly. Here’s how:
Credit Utilization: Credit scoring models, like FICO and VantageScore, use credit utilization as one of the main factors in determining your score. Credit utilization refers to the percentage of your available credit that you're currently using. If you charge up your credit cards during the holidays and carry balances over time, your credit utilization ratio will increase. Ideally, you want to keep your utilization below 30%. Higher utilization can negatively affect your credit score, making you appear more financially risky to lenders.
Payment History: One of the most significant factors in determining your credit score is your payment history. If you’re struggling to pay off holiday debt, you may miss a payment or make a late payment. Missing even one payment can lower your score by several points, and late payments can stay on your credit report for up to seven years. The more you miss payments, the more it will impact your credit score.
Interest Charges and Fees: Carrying a balance from your holiday shopping also means paying interest. Credit card interest rates can range from 15% to 25% or more, which means you could end up paying much more for your holiday purchases than you originally anticipated. This added debt can make it harder to pay down your balance, prolonging the impact on your credit score.
New Credit Inquiries: If your holiday spending caused you to exceed your credit limit or max out one or more of your cards, you might consider applying for a new credit card to help with the balance. While opening a new credit account may seem like a quick fix, it can temporarily lower your credit score due to the hard inquiry on your report. Plus, new credit can add to your debt load, making it even harder to get back on track.
How to Recover from Holiday Debt and Protect Your Credit Score
If you’re still paying off holiday debt, don’t worry — there are steps you can take to minimize the damage to your credit score and regain control of your finances. Here’s what you can do:
1. Create a Debt Repayment Plan
The first step is to create a realistic debt repayment plan. List all your credit card balances and prioritize them by interest rate, starting with the highest rate card. Focus on paying off the high-interest debt first while making minimum payments on the others. If possible, try to put extra funds toward paying down your balance.
2. Consider a Balance Transfer or Consolidation Loan
If the interest rates on your credit cards are high, consider a balance transfer to a card with a 0% introductory APR on balance transfers, or apply for a debt consolidation loan. Both options can help reduce the amount of interest you’re paying, allowing you to pay down the principal more quickly.
3. Lower Your Credit Utilization
If you can, try to reduce your credit utilization. This might mean paying off more debt or increasing your credit limit (though be careful not to overspend if you go this route). Keeping your credit utilization low — ideally under 30% — is essential for maintaining a healthy credit score.
4. Set a Budget for the Next Holiday Season
One of the best ways to avoid repeating the cycle of holiday debt is to plan ahead. Set a budget for holiday spending and stick to it. Consider using a debit card or prepaid card for purchases to avoid accumulating credit card debt. If you do use a credit card, make sure you can pay off the balance in full when the bill comes.
5. Track Your Credit Score
Monitoring your credit score regularly is a good way to keep tabs on how your debt repayment efforts are impacting your score. You can check your score for free through many financial institutions and credit monitoring services. Staying on top of your credit score will also alert you to any changes that could affect your ability to secure loans or credit in the future.
Moving Forward: How to Avoid Holiday Debt in the Future
The best way to avoid this issue next year is to be proactive. Consider the following strategies to reduce the likelihood of being stuck with holiday debt again:
Save in Advance: Start setting aside money for next year’s holiday spending early. Even small contributions each month can add up to a substantial amount by December.
Buy Gifts on Sale: Take advantage of sales and discounts throughout the year to buy gifts rather than waiting until the last minute and overspending.
Consider Alternative Gifts: Instead of expensive gifts, think about alternative ways to celebrate the holidays, like homemade presents, experiences, or family activities that cost less but still hold sentimental value.
While it’s not uncommon for people to carry holiday debt into the new year, it’s important to recognize the lasting impact that this debt can have on your credit score. Credit utilization, missed payments, and high-interest charges can all hurt your score, but with a solid repayment plan and smart financial strategies, you can work toward improving your credit over time. By staying on top of your finances and preparing ahead for next year’s holidays, you can avoid the cycle of holiday debt and give your credit score the boost it deserves.
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