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The holiday season is over, and with the great food, fun parties, and loads of presents came a startling reality: many of us went way over budget during the holidays, leaving us with significant debt and a financial “hangover” this January. With this in mind, we’ve come up with a list of the top five credit lessons that are particularly applicable at this time of year.
Excessive Spending on Credit Cards Leads to Trouble
Many Americans find it hard to limit themselves at Christmastime, particularly if they have kids or a long gift list. But spending beyond your limits can put a serious strain on your financial health — particularly if you rely too heavily on your credit cards at other times of the year. Furthermore, having multiple credit cards won’t help either.
Before making any credit card purchase, the question that you should ask yourself is if you can afford to pay off the bill when it arrives the next month. If the answer to that question is no, then you should forego that item — as difficult as it may be. Overspending during the holidays can make it difficult to pay your bills and meet your financial obligations throughout the year which is why it is important to avoid charging things that you cannot afford at Christmas.
Using Credit Can Be a Smart Option
While it isn’t wise to run up debt, there are times when it makes sense to use credit cards for your holiday shopping. This is particularly true if you are able to take advantage of special offers such as earning points or cash back on purchases or no interest on a store credit card. In these situations, credit often trumps cash.
During the holidays and at other peak spending times, many retail stores offer special deals on store credit cards. This may be anything from interest-free purchases for a certain number of months to a percentage off of your purchases for that day. If you are buying a big ticket item, such as a television or a computer, it may make sense to jump on these offers — but only if you can afford to pay off the item before the high interest rates start.
Similarly, if you have a credit card with points, airline miles, or cash back options, then consider doing your holiday shopping using this card. You could earn significant bonuses on things that you were planning to buy anyways. As long as you pay off your card when the bill comes, using a credit card for your Christmas gifts is a win-win scenario.
High Utilization Scores Hurt Your Credit Score
One of the most basic factors in determining how creditworthy you are is your credit utilization ratio. This is a simple comparison of the amount of debt you have to the credit available to you. If you have a $1,000 limit on your credit card and carry a $900 balance, then your credit utilization rate is 90%. If you have a total limit of $10,000 and a $1,000 balance, then your utilization rate is 10%. The higher your credit utilization rate, the lower your credit score will be — and the harder it will be to qualify for a loan. Ideally, your credit utilization rate should be 35% or less depending on your source. This is particularly important to remember during the holidays when many Americans overspend on gifts, parties, and vacations. Think carefully before going overboard this Christmas, particularly if you plan on making any big purchases that will require a credit check.
Fraud Protection is Critical
During the holiday season, credit card fraud tends to significantly increase, particularly through online purchases. If you are one of the unlucky ones that has been snared by a criminal, you may have already learned this lesson the hard way: a good fraud protection plan is vital.
Fraud protection can make sure that you are not on the hook for whatever havoc someone may wreak on your credit by stealing your credit card or your identity. Make sure that you have fraud protection available from your credit card company, and be sure to check your credit report annually for signs of fraud.
Late Fees and Interest Can Really Add Up
During the hustle and bustle of the holiday season, it’s easy to toss paperwork to the side. But if you fail to pay your bills, you may find yourself in a heap of financial trouble. Late fees are typically $35 or more — which are then added to your total balance. This balance will continue to grow each month as interest is added to the balance, making it even more difficult for you to pay off your credit cards. Late and missed payments will also harm your credit score. While you may be busy baking cookies, wrapping gifts or going shopping, remember that paying your bills is a priority — and set aside time to make sure that you pay each of your bills on time.
Author: Jeff Gitlen