4 Key Things That Could Impact Your Credit (And How to Handle Them)
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Credit is top of mind for many as we enter 2024. A strong credit score can open doors to better financial opportunities, such as securing lower interest rates on loans, obtaining higher credit limits, and even improving your chances of renting an apartment or landing a job. But as the economic landscape shifts, so too do the factors that influence your credit.
According to a recent survey by NerdWallet, nearly 79% of Americans are actively working to improve their credit. With debt levels rising and new financial challenges on the horizon, it’s more important than ever to stay ahead of the curve. In this article, we’ll explore four critical things that could impact your credit in 2024 and provide actionable strategies to help you protect your score.
Whether you’re dealing with holiday debt, rising delinquencies, student loans, or thinking about applying for new credit, being prepared can help you avoid common pitfalls and keep your financial health in check.
1. Holiday Debt: Managing Credit Card Balances Post-Season
The holiday season is a time for joy, gift-giving, and…credit card debt. As the festive cheer subsides, many Americans find themselves grappling with high credit card balances. In fact, NerdWallet’s 2023 Holiday Shopping Report revealed that over half (52%) of Americans incurred credit card debt during the previous holiday season, and a significant portion (31%) had yet to pay off those balances months later.
How Holiday Debt Affects Your Credit:
Your payment history is the single most important factor in your credit score, accounting for 35% of your total score. Carrying holiday debt into the new year can hurt your score if you miss payments or only make minimum payments. Furthermore, credit utilization—the amount of credit you use compared to your total credit limit—also plays a major role in your credit score, making up 30% of the calculation.
When you carry high balances, especially over 30% of your available credit, it signals to lenders that you may be overextended, which can lower your credit score. Keeping your credit utilization below 30% is a good rule of thumb for maintaining a healthy score.
Moreover, holiday debt can have a long-lasting impact on your financial health, leading to cascading effects that spill over into other areas of your credit. Missed payments and high credit utilization can negatively influence your ability to get approved for loans or credit lines at favorable rates. As 2024 progresses, managing that debt should be a top priority to maintain financial stability and keep your credit score intact.
Tips for Managing Holiday Debt:
- Make More Than the Minimum Payment: While it’s crucial to make at least the minimum payment to avoid late fees, paying down more than the minimum will reduce your balance faster and improve your credit utilization ratio. This will not only help your credit score but also save you money on interest charges.
- Plan for 2024’s Holiday Spending Now: Financial counselor Heath Carelock recommends starting early by setting a budget for holiday spending. Create lists for gifts and set spending limits. If you anticipate being financially tight, communicate with loved ones about your situation. Be honest and upfront about what you can afford, which helps reduce financial stress and guilt.
- Consider Balance Transfer Cards: If your holiday debt is substantial, consider a balance transfer credit card with a 0% APR introductory period. This allows you to pay off your debt without accruing interest for a set period, often 12-18 months. However, it’s important to note that most balance transfer cards come with transfer fees, so ensure you factor that into your repayment plan.
- Automate Payments: Setting up automatic payments can prevent you from missing any due dates, which helps protect your payment history. Even if you’re making minimum payments, being consistent is key to maintaining a solid credit score.
2. Rising Credit Card Delinquencies
Debt outside of holiday spending is also on the rise. According to a report from the Federal Reserve Bank of New York, debt balances across all categories surged by $228 billion in the third quarter of 2023. Credit card delinquencies, in particular, have risen above pre-pandemic levels, especially among millennials. As we move into 2024, this trend is expected to continue, posing a serious threat to credit scores.
How Delinquencies Impact Your Credit:
A credit card account becomes delinquent when a payment is 30 days or more past due. The later a payment gets, the more damage it does to your credit score. A payment that is 30 days late can drop your score by 90 to 110 points, according to FICO data. If the delinquency reaches 60 or 90 days, the impact is even more severe.
Delinquencies can make it harder to qualify for new credit and can lead to higher interest rates on future loans. Even after you pay off a delinquent account, the late payment can stay on your credit report for up to seven years, continuing to affect your creditworthiness.
Credit card delinquencies are a significant concern for financial experts in 2024 due to several factors, including rising inflation and the cost of living. Many individuals have been relying on credit cards to cover daily expenses, which increases the likelihood of delinquencies as budgets tighten.
What to Do if You’re Delinquent:
- Pay As Soon As Possible: If you realize you’ve missed a payment, pay it as soon as you can. The sooner you address the issue, the less damage it will do to your credit score. Even making a partial payment can help prevent the debt from being sent to collections.
- Contact Your Credit Card Issuer: Some credit card issuers may be willing to work with you if you’re struggling to make payments. Call them to explain your situation and see if they can offer a temporary hardship plan, which could reduce your interest rate or monthly payment for a limited time.
- Send a Goodwill Letter: If you’ve already paid the delinquent amount but want the missed payment removed from your credit report, you can send a goodwill letter to your credit card issuer. While there’s no guarantee of success, some issuers may remove the negative mark if you explain the circumstances and show a good faith effort to stay current on your payments.
- Debt Management Programs: If your delinquency is part of a broader debt problem, consider reaching out to a nonprofit credit counseling agency. They can help you set up a debt management program that consolidates your debt into a single monthly payment, often with reduced interest rates. This can prevent further delinquencies and help you regain control of your financial situation.
3. Student Loan Payments Resuming After Long Pause
Federal student loan payments, which had been paused since early 2020 due to the COVID-19 pandemic, resumed in October 2023. While many borrowers were able to enjoy a reprieve from making payments, the return of these obligations has put pressure on household budgets.
The Impact of Resumed Student Loan Payments:
For borrowers who have been struggling financially, the resumption of student loan payments may lead to difficulties in managing multiple financial obligations. Although the U.S. Department of Education introduced a 12-month “on-ramp” period that lasts until September 30, 2024—during which missed student loan payments won’t be reported to credit bureaus—interest is still accruing. This means your loan balance could grow significantly if you skip payments during this period.
While this “on-ramp” protects your credit temporarily, a rising loan balance and the eventual end of this grace period could result in overwhelming debt and a higher chance of missing future payments, which would hurt your credit score.
Student loan debt is one of the most substantial financial burdens for many Americans, and 2024 is expected to see more people struggling to juggle repayments along with other financial obligations. As inflation affects disposable income, student loan payments may become harder to manage.
Strategies for Managing Student Loan Debt:
- Make Payments During the On-Ramp Period: If you’re able to afford it, continue making your student loan payments even during the on-ramp period. This will help you keep your balance under control and prevent future financial strain.
- Explore Repayment Options: The Department of Education offers several repayment plans, including income-driven repayment (IDR) plans, which can lower your monthly payment based on your income. Consider applying for an IDR plan if your payments are too high for your current financial situation.
- Consolidate or Refinance Your Loans: For those with multiple loans, consolidating them into a single loan could simplify payments and potentially lower your interest rate. Alternatively, refinancing with a private lender might offer better terms, but be cautious—this will mean losing access to federal protections like forbearance and deferment.
- Budget for the Long-Term: As you plan for 2024, make sure to include your student loan payments in your budget. Consider cutting back on discretionary spending or finding ways to increase your income to help offset the added financial pressure.
4. Applying for New Credit: Risks and Rewards
Applying for new credit can be both a blessing and a curse for your credit score. On one hand, opening a new credit card or loan can increase your overall credit limit and diversify your credit mix, both of which can improve your credit score over time. On the other hand, new credit can also hurt your score by lowering the average age of your credit accounts and adding hard inquiries to your credit report.
How New Credit Affects Your Score:
When you apply for a credit card or loan, the lender will perform a hard inquiry on your credit file, which can temporarily lower your score by a few points. Hard inquiries remain on your credit report for up to two years but have less impact on your score as time passes.
Opening a new account also lowers the average age of your credit accounts, which is another factor in your credit score. A shorter credit history can signal to lenders that you’re less experienced with managing debt, which may result in higher interest rates or reduced borrowing limits.
While it might seem advantageous to open a new line of credit, it’s essential to weigh the benefits against the risks. Many consumers are tempted by promotional offers from credit card companies, such as 0% APR or cashback bonuses. However, these incentives can sometimes lead to overspending, which could negatively affect your credit utilization and overall financial health.
Before You Apply for New Credit:
- Compare Credit Card Offers: If you’re considering a new credit card, look for options with favorable terms. Balance transfer credit cards, for example, often come with 0% APR introductory periods, allowing you to transfer high-interest debt and pay it off interest-free for a set period. Just ensure you pay off the balance before the introductory period ends to avoid interest charges.
- Check Your Credit Report: Before applying for new credit, review your credit report to ensure there are no errors or inaccuracies that could lower your score. If you find anything that looks incorrect, dispute it with the credit bureau before applying for a new account.
- Borrow Only When Necessary: While opening new credit accounts can be beneficial in some situations, it’s important to borrow responsibly. Avoid applying for credit just because you’re offered a card or loan, and be mindful of how new credit will affect your overall financial situation.
- Consider Alternatives to Borrowing: Before applying for a new line of credit, evaluate whether it’s necessary. Can you manage your expenses by adjusting your budget or finding additional income streams? If so, it might be worth holding off on applying for new credit until you have a clearer financial picture.
Conclusion
As 2024 approaches, the factors that influence your credit score are changing, and it’s essential to stay informed and proactive in managing your credit. Holiday debt, rising delinquencies, student loan payments, and applying for new credit can all have significant impacts on your credit score, but by taking steps to manage these factors, you can protect your financial health.
Remember, your credit score is not just a number—it’s a reflection of your financial habits. Making smart decisions, staying on top of your payments, and being mindful of how you use credit will help you build and maintain a strong credit profile in the coming year.
Call to Action:
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