Editorial Policy

How to fix the holiday credit mistakes you made

Nick DiUlio

January 2, 2014

It's easy to get swept up in the chaos of the holidays, but after rounding the corner into the new year, many are left with debt regret.

“We want to put a smile on the faces of those we care about, so we overextend ourselves and assume we'll be able to pay for things in the months that follow,” says Beverly Harzog, author of “Confessions of a Credit Junkie. “But this can get us into a lot of trouble.”

The following credit blunders may look all too familiar. Yet they don't have to plague you for rest of the new year if you follow our experts' advice.

1. You charged more than you can pay back quickly

This is one of the most common mistakes consumers make during the holiday season, according to Becky Frost, senior manager of consumer education for Experian's online credit scoring services.

“You have a shopping list, you get into the store, and then you realize you forgot about a few people, and that can escalate into spending far more than you intended. Suddenly your budget blows up and you're in over your head.”

Your best move is to make spending cuts so that you have more money left over each month for debt repayment. If your debt is more than you can repay in several months (or you can't afford any more sacrifices), you might consider a balance transfer card to prevent interest from putting you deeper in the hole.

Those with good to excellent credit (FICO scores in the mid-700s or above), can probably snag a 0 percent balance transfer offer. Credit card issuers know that people often get in over their heads during the holidays, says Harzog, meaning there tend to be good balance transfer offers during the first few months of the new year.

For instance, the Slate card from Chase currently offers a 0 percent introductory APR on purchases and balance transfers for 15 months. It also comes without a balance transfer fee, which is typically about 3 percent for most other cards.

If your credit isn't stellar enough to obtain a card with 0 percent interest, Harzog still recommends shopping around. A card with a lower interest rate than what you've got could still help you come out ahead — just make sure to do the math and account for the balance transfer fee.

If you do a balance transfer, pay off every cent of your debt before the promotional period ends (and a higher interest rate kicks in) — and put your balance transfer card on lockdown after making the transfer.

“The biggest mistake people make with balance transfers is charging new items to that card,” Harzog says. “Never do that. See this as a golden opportunity to pay down your debt and nothing more.”

2. You added some store cards to your wallet

At some point during your holiday shopping marathon, a clerk (or several) offered you a store credit card and the allure of significant savings. Signing up made financial sense at the time, but now that the holidays have come and gone, what should you do with a store card you no longer need?

“The first thing you need to do is pay it off,” says Harzog. “These cards usually have very high interest rates, often between 20 and 30 percent, and the last thing you want to do is get stuck with compounding interest because then you've totally negated whatever money you saved in the first place.”

If you don't have the cash to pay off the debt right away, you might consider a balance transfer to another card.

“The best thing you can do is transfer that store card balance to a credit card with a lower interest rate,” says Scott Bilker, author of “Talk Your Way Out of Credit Card Debt” and creator of DebtSmart.com.

Once the store card's balance is paid off, you're faced with a question: Keep the card or cancel? Bilker recommends keeping the line of credit open. Having available credit you're not using can boost your credit score and might give you some wiggle room if you need credit in the future.

“I don't like to close credit card accounts unless I absolutely have to,” Bilker says. “Even if you're not using it, the extra available credit is always good to have in the long run. So unless they charge you an annual fee, hang on to the store card.”

Still, closing the card could be wise if the temptation to use it is just too great — or if you have too many cards to keep track of.

“You need to be honest with yourself. If you know that store card is going to burn a hole in your wallet, canceling it is the way to go,” says Frost.

You might notice a slight drop in your credit score after you close the card, but “the temporary dip in your credit score will return to normal over time,” Frost says. “And it's a small price to pay for avoiding future debt.”

3. You forgot a payment during the holiday chaos

There are few things more damaging to your credit score than making late payments. Here's the good news: Not all missed payments are created equal. According to credit expert Wayne Sanford, credit card companies generally don't report payment delinquencies to the credit bureaus until 30 days after the payment is due, which means consumers have a little bit of breathing room.

If you realize you're only several days late on a payment, “breathe a sigh of relief and make the payment right away,” says Sanford.

If you're a longtime customer with an otherwise great payment record, you may also be able to get the issuer to waive the late fee, Sanford says.

Delinquencies are reported to the credit bureaus once again if you're 60 days late. What's more, the 60-day mark is when issuers are allowed to increase the APR as a penalty for the lateness. If you think you're going to be more than 60 days late on a payment, Harzog recommends calling the issuer.

“If you simply don't have the cash flow, you need to call the card issuer and have a heart to heart,” says Harzog.

Some issuers have hardship programs, which may lower your interest rate or minimum payment. They're unadvertised, however, and you'll have to ask (perhaps even ask multiple representatives) until you're transferred to the right department. Also, keep in mind that hardship programs aren't an easy way out. Your charging privileges will most likely be frozen, and your participation in such a program could affect your credit (depending on how the issuer reports it to the bureaus).

4. Your card balance has put on weight

One of the most important credit scoring factors is your credit utilization ratio, which measures how much debt you carry in relation to your overall limit. For example, if you have a credit limit of $10,000 across your cards and you owe $3,500, that's 35 percent utilization.

The rule of thumb is to keep this ratio at or below 30 percent. If your holiday spending has elevated your utilization above that, your best option is to pay off the excess as soon as possible.

Sanford suggests two other possible solutions.

“Just ask for more credit,” says Sanford. “If you've got a good history with the credit card issuer, call them up and ask for an increase. Now you have more available credit and a slightly better utilization ratio.”

If your balance is scraping the ceiling of your credit limit, however, you're likely to look desperate — and your issuer is likely to say “no” to a limit increase.

The other option is to apply for a new card.

“If your credit is good, you should have no problem getting approved, and now you've got a brand new line of credit that will help spread out the ratio,” Sanford says.

If you go this route, though, discipline is key.

“Make sure you don't use that new card,” Sanford says. “Just let it sit in your wallet and focus on paying down your existing holiday debt.”