The rush to buy our loved ones thoughtful and often expensive gifts is here. It's the holiday season, meaning your wallet will likely take a hit. To emerge into the new year financially intact, it’s important to embrace caution when using your credit cards for purchases this year.
While credit cards can be helpful in allowing you to track spending and leverage credit card rewards for gift giving, misusing them is easily done.
To avoid credit calamity this holiday season, here are four dos and don’ts to keep in mind:
Credit Card Spending
Don’t spend more than you can afford. The rule of thumb when it comes to credit card spending is to pay back what you owe each month. But the majority of people don’t do this—in fact, according to the Federal Reserve, only 45% of people actually pay their entire balance in full each month. While not surprising, credit card holders should always strive to make that their goal. When it comes to holiday shopping, now is not the time to rack up your card with purchases.
Do create a holiday budget to help keep your cards under control. There are even budgeting apps like Rocket Money and Stash that you can download to help keep you within budget—so that when you hit your limit you know when to stop.
Store Credit Cards
Don’t use department credit store cards. Store credit cards have notoriously high interest rates, so it’s usually a good idea to decline the option to open one. While saving 10%–20% may sound like a good financial decision, you’ll now have a new card that can be tempting to use. Additionally, when you open a new card, an inquiry is registered, which can stay on your credit report for up to two years. Too many can make your score take a hit.
Do weigh your options if you spend a lot with a particular retailer. On the other hand, if there’s a store that you shop in often and you’re a responsible spender, you can cash in on exclusive discounts available only to cardholders. Additionally, store cards provide variety to your credit, which can be helpful toward your overall score. But as always, proceed with caution and make sure you’ve carefully weighed the pros and cons.
Don’t miss or make late payments. While missing a payment all together will certainly impact your credit score, so too can making late payments. You don’t want to incur the wrath of creditors calling and sending letters.
Do pay - at least - the minimum payment each month on time. If you’re struggling to pay the entire balance at the end of the month, or even if paying more than what you owe is hard, making the minimum payment on time is necessary to keep you on track and your credit score intact.
Don’t take a cash advance on your credit card. While these offers can be tempting, taking out cash against your credit card can hurt you financially. Not only can it negatively impact your credit utilization ratio, but the interest fees are high—with APRs as high as 25%, and you’ll likely pay additional fees of 3%-5% on the amount you were advanced.
Do consider loans and deferments. In this situation, it’s a better idea to carry a balance on your credit card so that you can free up cash in your bank account. You can also talk to your credit card lender about deferring payment if you’re feeling overwhelmed financially.
Do Look Into Credit Counseling
If you feel that your debt is climbing out of control, calling a credit counseling professional can help set you on the right path with a budget and the resources to regain financial stability. A counselor can also enroll you in a debt management program, where they'll work with your lenders to lower your interest rate and consolidate your loans into one affordable monthly payment.