Holiday Finance Tips for Shoppers Who Plan on Using Credit Cards
Getting caught up in the holiday shopping frenzy can mean bad news for your budget if you spend without a plan. That's especially true for credit card users who want to avoid the New Year's debt hangover that so often follows a December gift-buying spree.
If you're able to pay the balance off in full once the holidays are over, charging all of the items on your list can actually work to your advantage if you're able to earn some extra reward points or cash back along the way. You can run into trouble, however, if you're not careful about how and when you use your card. Before you head out to the mall, check out these holiday finance tips for keeping your credit card spending in check.
Set limits on purchases
Walking into a store with a credit card in hand and no set idea of how much you can afford to spend is the best way to blow your shopping budget all at once. Before you know it, you've charged your card up to the limit and there are still 10 more people on your list to buy for. Not only are you putting yourself in the hole but you're also increasing your credit utilization ratio, which can do some damage to your credit score.
Figuring out how much money you want to spend altogether and what you're going to shell out for each person ensures that you're not charging more than you really need to. When you're carrying balances on multiple cards, it's also a good idea to check how much of your total credit line you're using to make sure that your holiday shopping won't push you too close to the limit. If you're close to being maxed out, you may want to consider paying for some of your purchases with cash instead.
Steer clear of store card discounts
November and December is when retailers really start pushing their store credit cards, using incentives like a certain percentage off your initial purchase or free gift cards to get people to sign up. Getting a 10 or 20 percent discount may seem like a major score but what stores don't tell you is that you're going to pay a much higher interest rate for using their card. If you don't pay off what you charge right away, the discount may end up being virtually worthless.
You're better off using one of the rewards cards that's already in your wallet to buy items, even if it means missing out on savings at the cash register. For example, some cash back cards that rotate spending categories will offer bonuses at certain stores, like Best Buy or Toys R Us during the last few months of the year. The 5 or 6 percent cash you earn may be less than the discount you'd get from a store card but if you're paying less in interest, it balances the savings out.
Don't overspend to chase rewards
The more you spend, the more rewards you'll earn but you shouldn't feel obligated to charge every single gift on your list just to get more points. Unless you have a plan for using all those airline miles or points you're racking up, you're really just creating more debt for yourself unnecessarily. If you have a big balance that you can't pay off all at once, the interest you're being charged diminishes the value of the rewards you've earned and once again, it's putting the squeeze on your credit to debt ratio.
Instead of chasing rewards that you may or may not use, you're better off leveraging the ones you've already accrued to cross off some of the items on your list. Certain cards may offer an online shopping marketplace where you can redeem your points for merchandise or gift cards. Others allow you swap your airline miles for cash. If you're still set on using your card to get rewards, limit purchases to things that earn you the most points or cash back to get the most mileage out of what you spend.
Read the fine print on promotional offers
Special financing offers abound during the holiday season but they're not always as good as they seem. Paying no interest for six months or a year on purchases is definitely appealing but it can end up being a trap if you don't read all the find print. Missing a payment, for example, may trigger a late fee and the credit card company could decide to apply the interest retroactively to the original balance. Not only that, but it ends up being a black mark against your credit.
Before you jump on the promotional offer bandwagon, you need to be clear on how long the interest is deferred and what the penalties are if you get behind on your payments. Signing up for a new card just to get a lower rate in the beginning does you no good if you don't knock out your balance before the grace period expires or you can't pay on time.
In either case, you're going to end up feeling like a big time Grinch if those promotional deals end up costing more than you bargained for.