'Tis the season for consumers to go overboard with credit cards. If you have or plan to use credit cards during your holiday shopping trips, there are several ways to effectively manage and control your debt while keeping your credit score healthy. Here are 8 credit mistakes to avoid this holiday season.
Image courtesy of stockimages at FreeDigitalPhotos.net
Not Making a Reasonable Holiday Budget
According to the American Research Group, consumers said they planned to spend an average of $882 for holiday gifts in 2015, a 2% increase from 2014. Many experts suggest that your holiday expenses, including travel, parties, decorations, food and gifts, shouldn't exceed 1.5% of your annual income.
To put that into perspective, if you make $75,000 a year, your holiday shopping list should amount to no more than $1,125. To get an idea of how far that will take you, create a list of all of your holiday expenditures from your co-worker's gift to desserts you're bringing to your neighborhood Christmas party.
Buying Things with Credit (When You Don't Have Cash)
One of the most commonly cited cash versus credit studies found that consumers who pay for purchases with a credit card spend 12-18% more than cash consumers.
A heavy increase in credit utilization can drop your credit score.
A recent survey by T. Rowe Price found that while most families save throughout the year for holiday expenditures, nearly a quarter of survey respondents had pulled money from their retirement account, emergency fund or taken a loan to cover their holiday spending.
Not Paying Off Your Credit Card Balances in January
If you use credit cards to make holiday purchases, your best bet to keeping your credit score healthy post-holidays is to pay off the balance in full.
Not doing so means your credit utilization will be higher, likely resulting in a drop in your credit score, higher minimum payments in the months to come and more interest charges.
Opening Up New Credit Cards to Make Purchases
Many retailers will boost or heavily advertise the "rewards" offered for opening up a new credit account during the holidays. Though a 30% off reward may seem enticing, a credit inquiry can decrease your credit score and if you don't plan to pay off the balance immediately, those "savings" go away through month-to-month interest charges.
Using Multiple Credit Cards
Though there really isn't a whole lot of difference between using multiple credit cards or just one if you'll be charging the same amount, it's best to limit your spending to the credit card with the lowest interest rate (especially if you plan to carry a balance).
Also, if you use multiple cards that normally carry a zero-balance, you're more likely to forget about making an on-time payment.
Using Credit Over Cash
If using credit cards for purchases means you're likely to spend more, use the envelope system for your Christmas shopping. Place the allotted spending amount for each person in cash in separate envelopes. When the cash is gone, the shopping stops.
Disregarding Your Post-Holiday Credit Card Bills
Most consumers anticipate a higher monthly credit card statement in January but avoiding it or ignoring it won't make that balance go away.
If you know you've overspent, make a resolution to pay down the debt as quickly as possible. Start with the credit card with the highest interest rate and pay as much as possible while still fulfilling the monthly minimum payments on your other credit cards.
Maxing Out a Credit Card(s)
To keep one of the most important determining factors of credit score, "amounts owed", in good standing, limit your spending to less than 30% of your credit line on each card. Higher utilization ratios will cause your score to dip.
Not Giving Your Monthly Statement a Second Look
Another reason to double-check your statement? Fraudulent holiday charges. According to the United States Federal Trade Commission, 10 percent of Americans have been victims of credit card fraud.
Some of the best tips to avoid credit card fraud, especially for online shoppers, include:
- Using strong passwords for credit accounts.
- Avoiding making online purchases on unsecured Wi-Fi networks.
- Opting for paperless statements.
- Bi-weekly monitoring of credit and debit card accounts.
- Keeping your contact information up-to-date, so your credit card company can contact you in the case of suspected fraud.
Whether you're looking to finance a home, car, etc. in the coming months, it's important to keep your credit score high and your debt low to achieve loan eligibility, affordability and lower interest rates.
For more information about buying and financing your first home, download our free Mortgage 101 Handbook for everything you need to know as a first-time homebuyer.