T-minus two and a half weeks until Black Friday. It’s called Black Friday because that’s the day retail stores supposedly begin to become profitable or move into being “in the black” for the year. I’m not sure if that’s actually true but it does make for a clever moniker.
What is true is the fact that we’ll spend the better part of the five weeks that follow Black Friday either shopping or returning at retailers, both brick and mortar and web-based.
And while it’s kind of a holiday buzz kill to bring it up, there are some pretty significant mistakes you can make while shopping, if you’re not careful.
Don’t Fall For Retail Credit Card Offers
Close your eyes for a moment and picture a credit card that can only be used at one chain of stores. That card also has a credit limit around $1,000, unless you’re lucky.
And finally, that card has an interest rate of 24.99%. What kind of card am I describing?
Those are the attributes of most retail store credit cards but they sound more so like those belonging to sub-prime credit cards.
They only way you would have interest rates on your general use credit cards (Visa, MasterCard, Discover, American Express) that high would be if you A) had poor credit when you initially applied, or B) missed payments and ended up at or near the credit card’s default rate.
Of course, when you’re at the register and the clerk offers you a 10%-20% discount, you’re not really thinking about account terms and credit limits.
You’re also not thinking about how those retail credit card inquiries on your credit reports are the most damaging type or how even modest purchases on a retail store card can leave it leveraged to the point where it can damage your credit scores.
Choose Credit Over Debit and Cash
This is a very counter-intuitive piece of advice because it’s common knowledge that using cash and debit cards will help control your spending, whereas credit card spending can easily spin out of control, especially during holiday shopping euphoria.
And while I almost always suggest credit over debit, or cash for those who are responsible spenders, I amp up my volume during holiday season. Here’s why:
When you use a debit card for purchases, it’s your money that is taken directly from your checking account. That means any purchases that get disputed will drag against the balance of your checking account, including those that may be fraudulent (fraudsters work overtime during the holiday season).
The Fair Credit Billing Act, as well as the rather generous consumer protection policies of gold standard issuers, like American Express, protect purchases made using a credit card. You can’t say the same thing for the purchases you made using cold, hard cash.
If You Do Choose Credit Over Debt, Choose The Tallest Card
Now that I’ve convinced you to use a credit card for your holiday shopping, I’d like you to use the credit card with the largest credit limit.
Using the card with the highest limit helps to protect your credit scores, which could be important for those of you who are not going to be able to pay off your balances in January and have plans on buying a home or refinancing an existing mortgage.
The issue at play when choosing the right card is the balance to limit ratio, which has many names including the “debt to limit ratio”, the “balance to credit percentage” and “revolving utilization.”
Regardless of what it’s called, the percentage of your credit card credit limits that are currently being used in the form of a balance is a driving factor of your credit scores.
The value of that percentage is misrepresented all over the web. Some people say it’s worth 30% of your score (incorrect). Some people say you should keep the percentage no higher than 30% (nope).
According to FICO, the folks who invented credit scoring and my employer for seven years, the people who have the highest scores have an average utilization percentage of 7%. It’s easier to be close to 7% when your credit card has a $20,000 limit rather than a $1,000 limit.
That’s why you have to choose the card with the highest limit.
John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a contributor for the National Foundation for Credit Counseling. He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. The opinions expressed in his articles are his and not of Mint.com or Intuit. Follow John on Twitter.