The holidays are full of fun and festivity including decorating, parties, and gift exchanges with loved ones. Carrying on family customs and starting new traditions often comes with an uptick in spending. So, what’s the best way to handle the added financial need? Should you increase your line of credit for the holidays? Pay cash? Or adjust your expectations?
If you want more flexibility during the holidays, you might consider increasing your line of credit, asking for a higher limit on an existing credit card, or applying for new credit. While credit can make spending easy and convenient, it’s essential to never take on debt that you cannot afford.
Here are some aspects to consider when increasing your line of credit for the holidays.
When to avoid increasing your line of credit.
An increased credit line can be useful during the holidays, but it’s not a great fit for everyone. Here are three reasons why you may want to avoid getting a credit limit increase:
- You’re concerned about spending habits. When you increase your line of credit, you increase your spending power and subsequently, the amount you have to repay. If you have a history or maxing out credit lines or have had a decrease in income, then increasing your limit is a temporary gain that may cause financial trouble.
- You’re already struggling to repay existing debt. The pressure of the holiday season can put a strain on families. Increasing credit could provide temporary relief. However, if you’re currently struggling to pay debt, then increasing your credit line is not the answer.
- You don’t want a hard pull on your credit report. When requesting a new line of credit or an increase to your credit limit the lender will need to pull your credit. This hard pull could impact your credit score and limit other borrowing opportunities for one to two years.
The holiday season can bring attention to financial challenges. If you’re struggling with debt, it can feel like there’s nowhere to turn for relief. That’s why OnPoint is partnering with GreenPath Financial Wellness to give our members access to free financial counseling. If you need support, contact GreenPath today.
If you’re in a sound financial position and can take on new credit obligations, consider some of the benefits before you do your shopping.
Benefits of increasing your line of credit.
The most immediate benefit of increasing your line of credit is more buying power. Even after budgeting, you may still need or desire access to additional funds during the holidays. Or, you may want to capitalize on the rewards or security of using credit over cash.
Protect your credit score.
Your credit score measures your creditworthiness. It’s calculated a bit differently from one lender to another and there are various activities that you may take that can either raise or lower your credit score.
The factors that influence your credit score include the amount of debt you carry, whether you pay on time, and your credit utilization ratio. The last factor compares the amount you owe against your credit limit. Generally, a utilization ratio under 30 percent is better for your credit score.
For example, a person with a credit card limit of $5,000 and a balance of $1,000 is utilizing 20% of their available credit (1,000 divided by 5,000 = 20%). A 20% utilization is a positive signal to lenders showing that a cardholder can manage their available credit without overspending. However, if the cardholder can comfortably afford to repay a balance of $2500, it still may not be in their best interest to use the card. Using $2500 of an available $5000 will raise the utilization ratio from 20% to 50% (2500 divided by 5000 = 50%) and may have an adverse impact on the borrower’s credit score.
If you’re planning to use existing credit for purchases during the holidays, then increasing your credit limit preemptively drops your credit utilization ratio. If you spend more after an increase, then you can still maintain a desirable utilization ratio.
Using the example, if the credit limit is raised from $5000 to $10,000 then the borrower would be able to have a $2500 balance without surpassing the target 30% credit utilization ratio.
By increasing your credit limit, you may be able to protect yourself from any adverse impact on your credit score while spending during the holidays.
Decrease financial stress.
Holiday cheer is often accompanied by financial stress. Concern about how you’re going to pay for everything during the holidays can put a damper on the season. Increasing your credit line could help alleviate the worry.
The goal should always be to work holiday expenses into your budget; however, that’s not always realistic in the short-term. Budgeting to pay off holiday purchases made with credit throughout the year may be less stressful and simpler to manage.
Take advantage of credit card incentives.
Even if you have funds budgeted for the holidays, it may still be a better idea to use your credit for holiday purchases.
Many credit cards offer rewards points and cash back opportunities.
Increasing your credit limit protects your credit utilization ratio while giving you the opportunity to capitalize on credit card rewards. Additionally, credit cards also come with greater protection for purchases than are available with cash and debit cards.
Instead of increasing your limit, you may consider adding a new card to your wallet. New credit cards often offer bonus points, perks or cash incentives for using the new card. So, if you’re in the market for a new rewards credit card, then applying during the holidays is a good opportunity to capitalize on incentives.
Provide emergency funds.
If you have cash on hand for all your planned holiday spending, you may not need additional credit. However, are you prepared for an emergency after spending the cash?
Opening up new credit before you need it can help provide a safety net in case of the unexpected. Having access to a financial resource for emergencies can help your peace of mind during and after the holidays.
How to increase your line of credit.
Increasing your line of credit requires working with lenders to find the best option for you. This could include asking for a credit increase on your existing accounts or applying for new credit.
Ask for a credit increase.
You can ask for a credit line increase if your issuer hasn’t given you one recently. You’ll likely need to share your reason for the increase—lenders will have different criteria for evaluating your request. You can also ask your lender about their criteria to determine if increasing your limit is your best option.
Apply for new credit.
Any new card will increase your overall credit availability. Applying for a new credit card may be simpler than getting a credit limit increase on your current card—“I want to spend more money during the holidays” isn’t a sufficient reason to get a credit limit increase. When applying for a new card, you’re more likely to be approved if you have a strong history of repaying your debts on time and have the capacity to take on and repay additional debt.
Any new card will increase your overall credit availability and trigger a hard pull on your credit report. It’s also possible to utilize a balance transfer offer and transfer your current balance to a new card with a lower interest rate. This option can do double the work for you, by both opening up some new credit on your current card and decreasing the cost of your existing debt.
However, you’re not limited to increasing your credit through a new credit card. A personal loan, personal line of credit, home equity line of credit (HELOC), or cash out home refinance might be a better option for you.
Pay off balances.
While paying off balances does not give you access to additional credit, paying off what you owe will free up your credit so that you can use it for holiday expenses. Paying off a balance only to use it again may not seem like much. However, if you’re using a credit card with rewards it can give you an opportunity to gain additional points or cash back on your planned spending.
The simplest way to increase your line of credit is to wait for it. Your credit issuer will usually increase your limits automatically if you’ve proven your financial responsibility by paying all your bills on time and showing that you can responsibly manage credit. The best part about waiting for an automatic credit increase is that the increase does not require a hard pull on your credit report.
Lastly, be careful about applying for too many offers at the same time. Each application prompts the issuer to pull your credit score. Too many pulls can lower your score and result in getting declined.
To learn more about credit, consider visiting our free financial education resource Enrich.