Around this time last year, cybercrime went mainstream with Target’s announcement that the credit and debit card accounts of 40 million shoppers were nabbed during the height of the holiday shopping season. Worse, the personally identifiable information of 70 million Target customers was in the wind. Before you get too worked up, here’s something to remember: Breaches are and will always be the enemy, but the more likely source of financial woe this holiday season looks back at you in the mirror every day.
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Getting consumers and enterprises up to speed in the realm of data security continues to be a work in progress. Most people know not to click on any old link that hits their inbox and they are familiar with the basics of how to protect themselves from cybercriminals (whether or not they actually put them in practice).
However, while all of us are at risk of becoming a victim of identity theft this holiday shopping season, there’s an even bigger problem. It not only pre-dates the digital era, it was around long before credit cards: It’s spending more than you can afford. But don’t break that mirror. Seven years of bad luck will seem like a great deal compared to the seven years of tough luck you will experience if you don’t manage your credit intelligently.
It’s common sense. If you overdo it this holiday season, the credit you use will become the gift that keeps on taking. And it’s not just interest charges that will be a drain on your budget — it’s the long-term credit implications.
How Overspending Can Hurt Your Credit
Debt usage is the second biggest factor in your credit score, accounting for about 30% of it. Your score considers your amount of debt, including the amount you owe on installment loans, as well as your credit utilization — how much of your available credit on revolving accounts (like credit cards) you’re using. The less you use of your credit lines, the better.
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With Black Friday and Cyber Monday rapidly approaching, you may be looking for a way to stretch your buying power. While it may seem counter-intuitive, increasing your available credit with a new card (but not just any card) may actually improve your standing with the credit reporting agencies. But you have to be smart about it.
When you open a new credit card, you can increase your available credit, and thus can raise your credit scores. But if you max out that card when you open it, and carry that balance long past the holidays, it defeats the purpose. A good rule of thumb is to keep your total credit utilization of your credit card accounts under the 10% mark.
While a new credit card can help make ends meet and facilitate big purchases that would otherwise be out of reach (or a lot of smaller ones for the holidays), it only works when managed correctly.
The first consideration is financial feasibility—something you know better than even the credit bureaus Equifax, Experian and TransUnion—and there should not be a sliding rule when it comes time to do your holiday shopping. If you carry a balance on your debts, you should be able to make more than the minimum payment every month. Ideally, you should charge no more than what you can pay in full.
When thinking about how much credit you should have and how much you should use, it can be helpful to think of the various forms of credit as an array of wealth-building tools, kind of like stocks and bonds in an investment portfolio. Your credit portfolio, as it were, has a few moving parts that are used to figure out how much credit you can handle without finding yourself under water.
The Credit Score Implications
Will a new credit card offer at the checkout counter help your credit score? Not always. (However, you can use Credit.com’s free credit score tools to see your credit scores and get a breakdown of how your credit behavior is affecting your scores. Also be sure to pull your full free credit reports at least once a year from AnnualCreditReport.com.) If you have not shopped for a new credit card in a while, a new account will increase your available credit, and if you pay off the balance on that account every month or keep it under the 10% mark, your score should increase with this addition to your credit portfolio, which will, in the long run, make you a stronger candidate for bigger loans down the line.
If you handle your credit well, it can be the gift that keeps on giving. Get it wrong and your financial life will make the Grinch smile ear-to-ear.
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Adam Levin is chairman and co-founder of Credit.com and Identity Theft 911. His experience as former director of the New Jersey Division of Consumer Affairs gives him unique insight into consumer privacy, legislation and financial advocacy. He is a nationally recognized expert on identity theft and credit.