The Little-Known Way Holiday Shopping Could Hurt Your Credit Score -- and How to Avoid It

The holidays are technically still a few months away, but the holiday shopping season is about ready to kick off. Retailers like Walmart have announced holiday deals beginning in early October, giving shoppers a chance to start early if they want to.

It makes sense because the high cost of holiday meal items and gifts can take a real toll on your finances. The high credit card bills you'll face over the next few months are only part of the issue. Your credit score could also take a big hit from your increased spending, but there might be a way to avoid this.

Be careful how much you charge to your credit cards

Technically, you're allowed to charge up to your credit limit to your card each month, but this is risky. If you can't pay back what you borrow, you'll rack up expensive interest charges and you may not be able to use that card again when you need it.

Using most or all of your available credit also increases your credit utilization ratio. This is the ratio between the amount of credit available to you and the amount you're actually using. If you have a $3,000 balance on a card with a $10,000 limit, your credit utilization ratio is 30%. Generally, you don't want it to be higher than this if you're trying to keep your credit score high.

Lenders view higher credit utilization ratios as a sign that you're living beyond your means. They see it as an increased risk that you won't be able to pay back what you owe, so credit scoring models ding you accordingly. Your credit utilization ratio accounts for 30% of your credit score, making it the second-most important factor after payment history.

This is an issue people often run into during the holiday shopping season because they're spending a lot more than usual. If your credit score takes a hit due to increased spending, it might not be a big deal, so long as you resume your normal spending patterns afterward. But if you're unable to pay off what you owe immediately, that credit score dip might be much longer lasting. It could also cost you a lot more if you try to take out a loan in the future.

How to buy what you need without hurting your credit

There are several ways you can get what you need for the holiday season without raising your credit utilization ratio too much, including:

• Spread your spending out over time: Take advantage of the early holiday shopping deals and spread your payments out so each bill isn't too high.
• Pay in cash when you can: These payments won't count against your credit limit, so they won't hurt your score.
• Pay your credit card bill twice per month: The credit bureaus only see your balance at the end of each billing cycle. Paying your bill halfway through the month and again at the end makes it appear as though you spent half as much as you actually did.
• Keep your costs as low as possible: Be choosy about what you buy and search for coupons to reduce how much you pay for your holiday goods.
• Try layaway: Layaway services let you pay for goods in installments without counting toward your credit utilization ratio.

If you truly don't think you can avoid carrying a balance, try to keep it as low as possible. You might also consider using a balance transfer card with a 0% introductory APR if you have one. This way, your balance won't accrue interest for the first few months. It won't help you lower your credit utilization ratio, but it will give you a better chance of paying off your debt before you get hit with extra fees.