Beware the aftermath of holiday credit card shopping
How to avoid falling into the vicious debt cycle associated with holiday spending
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Holiday shopping can tempt you to overspend, but that can leave you buried in debt when the new year arrives.
On average, consumers are expected to spend $1,536 this holiday season, up from $1,226, according to a survey by consulting firm Deloitte. And nearly 8 in 10 consumers (78 percent) are planning to spend more or the same as they did last year.
If you plan to be exceptionally generous with your holiday gift buying this year, there are some savvy ways to avoid a financial hangover. Keep reading for expert advice on how you can avoid the pitfalls of holiday spending.
How to avoid a holiday spending hangover
Consider a 0 percent APR credit card
One way to minimize damage associated with overspending during the holidays is to apply for a new card with an introductory 0 percent APR, such as the Capital One Quicksilver Cash Rewards Credit Card or the Discover it® Cash Back card, according to Jacob Dayan, CEO and co-founder of Community Tax and Finance Pal.
Another option to consider is a balance transfer card with an introductory 0 percent APR period. After your holiday spending is done, you can transfer debt from an existing credit card onto the new one and pay the debt off at 0 percent for an extended period of time, Dayan suggested.
This will enable you to stop paying interest on the debt you owe on your old cards for however long your new balance transfer card’s introductory period lasts (typically 12-21 months, depending on the card). Keep in mind that balance transfers typically come with a 3-5-percent fee, though some waive the fee if you complete the transfer within a set period of time.
Many balance transfer cards also offer an introductory 0 percent APR on purchases. One card to look at is the Citi Simplicity Card, which has some great perks – it offers a 12-month, introductory, 0 percent APR on purchases and a 21-month, introductory, 0 percent APR for balance transfers. While the card offers a variable APR of 16.24 percent to 26.24 percent and has no annual fee, you will have to pay a 5 percent fee on any transferred balance.
Pay your balance before the intro period ends
It’s also crucial to keep in mind that credit card interest is accrued from day one, advised RJ Mansfield, retired financial professional and author of “Debt Assassin: A Black Ops Guide to Cleaning Up Your Credit.”
If you pay your balance in full by your statement due date, you won’t be charged interest. But if you miss a payment, you don’t pay the balance in full by the end date or you’re late on one payment, the card issuer will instantly tack on the interest from day one, voiding the 0 percent interest offer.
In addition, Mansfield warned, the minimum required payment on these offers rarely results in the consumer paying in full on time to meet the 0 percent interest agreement. And again, that will result in the card issuer immediately adding the interest.
“Remember, with these offers – as with any credit card – you can't double up on a payment in any given month and think you don't have a payment due the following month. If you have a balance, you must make at least the minimum monthly payment,” Mansfield said.
Robert Forrester, financial advisor at National Securities Corporation, advises to proceed with caution if you’re considering a retail card that offers a deferred interest deal.
“With these cards, you can delay your interest payments for 18 or 24 months. But be wary and read the terms. Some of these cards are attractive, but if you don’t pay the balance in full by the end of the term, they will charge you interest on the entire transfer amount. Do yourself a favor and set yourself up to pay off the entire balance at the very least by the time the term ends,” Forrester said.
Mansfield noted the approval criteria for retail cards is generally less stringent than for a standard credit card application.
“These offers target people with weak credit scores,” he said. “Consumers with good credit receive offers throughout the year from their current credit card companies with longer and more favorable terms.”
Create a budget and stick to it
Consumer finance expert Kevin Gallegos, senior vice president of client enrollment at Freedom Debt Relief, has some tough, but good, advice regarding holiday spending – rely strictly on a budget.
Many people get into spending trouble and pull out the credit card too often because they haven’t planned their purchases. The trick to avoid that is knowing ahead of time what you can spend by developing a simple holiday budget, Gallegos said.
“Calculate how much you can and want to spend for holiday festivities, and write it down. Compare your total to a list of everything you anticipate spending on this holiday season, and be prepared to modify,” he advised.
Depending on your individual situation, you might need to include:
- Everyone you'll give a gift to and how much you plan to spend
- Cards and postage (which could be zero if you send cards online or by email)
- Entertaining, including food, drinks, special garments, childcare, etc.
- Year-end tips for newspaper carriers, babysitters, housecleaners, doormen, hairdressers and other service providers
- Gifts for teachers, doctors, neighbors or others close to you
- Travel costs
Proceed with caution if you decide to get a new card
If you decide on a new card, do some due diligence and examine the fine print for any fees or penalties that might come with it, Dayan said.
Additionally, don’t forget that applying for a new card can ding your credit score due to a hard inquiry and by lowering the length of your credit history.
Depending on your individual situation, getting a new card might not be the best solution for holiday spending.
Gallegos believes applying for a new credit card for holiday purchases you can’t pay off in a timely manner is a definite no-no.
“If you’re doing it because of a low interest rate, that implies you might be planning to make purchases you would not be able to pay off in full at the end of each month. No matter how good an interest rate, you never want to carry a balance,” Gallegos said.
It might be tempting to get a retail card during the holiday season because they can offer benefits such as store-specific rewards and discounts. Those cards, however, typically come with very high interest rates. Instead, see if you can get the retail card perks – such as promotions, sales and coupons – by signing up for an email list.
The bottom line
Now that you’re armed with information, you’re ready to make good choices regarding your holiday spending. Make a budget and stick to it. Consider taking out a new 0 percent interest credit card to use if it’s right for your financial situation, or think about a 0 percent interest balance transfer credit card after your shopping is done – and make sure either way that you pay off your balance before the introductory periods end.
This year, turn holiday shopping into a fun and carefree experience instead of one fraught with stress over how you’re going to pay for it.
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