HOW TO USE A CREDIT CARD RESPONSIBLY DURING THE HOLIDAYS
Let’s talk about how to use a credit card responsibly this holiday season. After all responsible, smart credit card use means less stress and more enjoyment during the holidays and in months to follow.
According to a study by MagnifyMoney, the average holiday debt taken on by Americans was $1230 during 2018. Add to this,
- Two-thirds of these people hadn’t expected to resort to debt for their holiday spending.
- 7 out of 10 people with holiday debt acquired it through credit cards – which is possibly the most expensive debt. Other forms of debt included personal loans, payday loans, etc.
- More than 60% of people with holiday debt reported feeling stressed about it.
Yes, credit cards can be easily misused to get into unwanted, stress-inducing debt, especially during the shopping frenzy of the holidays, but they are also a great tool if you use them responsibly.
With the holidays officially kicking off on Black Friday, it is the right time to understand how to use your credit card smartly and make your Christmas shopping experience enjoyable by avoiding a stress-inducing debt hangover going into the next year.
In This Article:
How Credit Cards Work
How Credit Card Companies Make Money
Why You Should Use a Credit Card Responsibly
How To Use a Credit Card Responsibly
Using A Store Credit Card Smartly
Use A Credit Card Strategically For Rewards & Benefits
Tips To Avoid Credit Card Debt Over The Holidays
Things To Consider Before Applying For a New Credit Card
When Not To Use A Credit Card During The Holidays
How Credit Cards Work
A credit card is an amount of credit extended to you (the credit card holder) which allows you to make purchases. Each purchase is a loan you take from your credit card company. You can continue swiping your card (and borrowing) as long as your total debt is less than the credit limit sanctioned for you.
After you make a purchase, the bank gives you a few days’ time, till the due date, to pay them back. This is known as the grace period.
How Credit Card Companies Make Money
In order to understand how to use a credit card responsibly, it is important to understand how your credit card company makes money. After all, they are making that money off you.
Each time you make a purchase you are taking a loan to make a purchase. Like any other loan you take, this loan has an interest rate that you are charged from the date of purchase and have to pay.
However, if you repay the ENTIRE amount you owe to the company before the due date then your interest is waived off. In other words, you got the loan at zero cost. This is why responsible credit card users pay off their credit card bills in full each month.
Unlike other loans, which have a fixed end date and monthly payments, a credit card company allows you to choose how much you want to repay and when. You can pay the entire amount due, less than that, or the minimum amount that you are asked to pay. This is where credit card companies start to make money.
Whenever a borrower pays anything less than the balance in full interest charged on the outstanding amount becomes payable. This interest is the biggest source of income for credit card companies.
In addition, every future purchase will not enjoy any grace period. In other words, you will have to pay interest from the very first day of the loan. That’s a double whammy for the credit card holder and a win-win for the credit card company.
Apart from interest on the amounts due, credit card companies also charge you fees and other charges.
Why You Should Use A Credit Card Responsibly
Before we see how to use a credit card responsibly, let us understand the benefits of using a credit card responsibly.
Build Credit Payment History
Having a consistent payment record is important in order to get a loan. Every time you pay off your credit card dues in time you are establishing a credit payment history. If you don’t use your credit card, there is no payment history on your record.
Making sure you spend only as much as you can afford to pay is being responsible and helps build your credit payment record. Don’t let the holidays derail your efforts.
Raise Your Credit Score
To build your credit score it is advisable to put a couple of purchases on it each month that you will repay in time. Avoid racking up purchases that will get you into debt.
It is also important to avoid using up your entire credit limit or even close to it. The lower your credit utilization limit (the amount you owe divided by the available credit limit) the better it is for your credit score.
Avoid Expensive Interest Charges
Credit cards charge amongst the highest interest rates in the industry. They are likely to be the most expensive form of debt for a person. Heavy interest payments raise the cost of your purchase.
Have you heard of the term APR (Annual Percentage Rate) of your credit card? It is the rate at which your card company charges you interest on your debt and is mentioned in monthly statements. Make sure you are aware of APR on your cards.
To calculate the interest you need to pay, your APR is converted into a Daily Percentage Rate (DPR). This DPR is applied to the entire balance that is owed to the credit card company, both the overdue amount and the purchases made in the current billing period. Remember that you do not enjoy any grace period on new purchases if you haven’t paid your previous bill completely.
In addition to interest, credit card companies charge late payment, cash advance, foreign transactions, and various other fees.
It is important to be aware of these fees so that you can avoid incurring them.
Earn Cash Back or Other Rewards
One of the big reasons why people use credit cards is for the rewards and benefits they earn by using their cards. However, these rewards are beneficial and make economic sense if the cards are used responsibly.
Incurring debt is a very expensive way to earn cash-back or any other rewards. Your interest cost may outweigh the price of what you get back.
Pay For A Large Purchase Over Time
A zero or low APR or a deferred interest rate card when used correctly can be a great way to finance a large purchase as long as you are diligent about making your payments on schedule.
Get Fraud and Purchase Protection
All major card networks provide various types of protection to the cardholder at no extra cost. These limit your liability in case of fraudulent use, provide you purchase protection for 90-120 days if what you bought breaks down or is stolen.
How To Use A Credit Card Responsibly
Keep Track Of Your Spending
It is very easy to rack up debt on your credit card especially when you are shopping for Christmas. But can you afford that debt?
Being responsible starts with knowing how much you are spending on each credit card.
You can do this in a simple worksheet. Note down the amounts you are spending on each of your different cards. Make a note of the total amount you have outstanding each time.
I would suggest you go a step beyond that. Keep track of not just the amounts spent on each card, but also their due dates, and the billing cycle of each card.
Knowing the start and end dates of your credit card (i.e it’s billing cycle) helps you determine how much of your purchases will be due for payment this month. Anything bought after your last billing date will be due for payment in next month’s bill. This way you know you have to stop spending once you have spent the amount you can afford to repay.
Remember, purchases made in the first few days of your billing cycle enjoy the longest credit period. (This strategy works if you are paying your dues in full each month.)
This way you can avoid overspending money that you cannot afford and even take advantage of the billing dates.
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Check Your Credit Card Statement Regularly
Errors in billing, misuse of your card and fraud can cause havoc with your billed amounts. Checking your credit card statements regularly can help you stay on the top of your personal finances.
Here are some things you should look for when checking your credit card statement:
- Charges from stores you do not recognize or remember
- Large or unusual charges
- Duplicate amounts
- Confirm that regular debits are correct.
Contact your credit card company immediately if you see any unauthorized or mistaken transactions. They may be able to reverse the transaction.
Sign Up For Mobile Alerts
Don’t wait for the end of the month to know the details of your bill and the amounts you have been charged. Sign up for text alerts on your mobile phone from your credit card issuer.
You can know within minutes in case your card has been charged by mistake or fraudulently. What is more, they remind you of the amount you have to pay and the due date.
Many of us sign up for alerts but don’t check them regularly, if at all. My husband has a simple habit that helps him check for mistakes. He keeps his text messages open each time he swipes his card so he can immediately confirm if the amount charged is correct. Then he deletes the message to avoid overwhelm.
He schedules reminders for all subscriptions and recurring automatic payments that are charged to his credit card. Once he checks the amount he has been charged, these messages are also deleted. This way messages do not pile up in the inbox of his phone.
Finally, he checks if there are any other text alerts from his credit card company.
Should he get a message that he does not recognize I know he will call up the bank immediately. Thankfully, he has never needed to.
Pay Off Your Entire Credit Card Bill On Time.
Are you someone who pays off all their bills promptly and always before their due date especially their credit card bill? Or do you sometimes forget or are unable to do so?
It is important to be cognizant of the benefits of paying off your credit card bills.
Not only do you avoid paying hefty interest and fees but you are also building a consistent payment record if you pay off the entire bill promptly each month.
This can happen if you know how much you can afford to spend each month. Making a plan for your money and then following it helps. Avoid buying stuff that is not on your budget and you haven’t planned for.
Having Too Many Credit Cards Isn’t Always Good
Don’t be mistaken that credit cards can hurt your credit score only if you have credit card debt. Even applying for a new card has an impact. It does not matter if you are approved for the card. So really make sure you need the card before applying for one.
Using A Store Credit Card Responsibly
Store credit cards are similar to traditional credit cards. You can make purchases on them. Each time you use the card you owe money to the store that you can pay off over time.
Then what is the difference you might ask? The elephant in the room is the difference in APRs. A survey by CreditCards.com found that the average APR on store-only credit cards was 27.52 percent. As compared to this the average APR for all credit cards is 17.20 percent as of November 27, 2019.
This makes it more important that you know how to use your store credit cards right.
Let’s get started
Firstly, Pay off your balance before interest kicks in
Every strategy to use a regular credit card responsibly also applies to store credit cards. But due to the difference in APRs, this one is crucial and deserves to be mentioned once again.
The APRs of store cards are so high that any discounts or rewards you might have earned can be wiped out in just one month if you carry over a balance.
So, if you can’t afford to pay off the amount before the due date of the first bill, don’t use the card.
Second, don’t shop just to avail of a discount
Don’t spend money you have not planned to spend just to get a discount. If you planned to spend only $100 on a holiday gift, don’t spend $150 just to avail of a 10% discount that kicks in at that level. Even after applying the discount you would have spent $35 extra which you hadn’t planned for.
Similarly, don’t spend money just to use a coupon that your card offers. Take a moment to ask yourself two questions:
- You have planned to buy the item i.e. have a budget for it.
- If you would have bought it had the discount not been there.
If your answer is no then it is time to bid adieu to it and move on.
Zero-interest rate OR deferred interest rate?
Some store credit cards offer zero-interest loans for a certain period of time say 18 months.
Unlike regular credit cards with zero APRs, there is a pretty good chance that your store credit card has a deferred interest offer.
It may sound attractive to get a break on big-ticket items, but deferred interest cards come with several (expensive) catches. An interest-free period is great if you completely pay off your loan on time. But if you don’t you won’t just pay interest on the remaining balance. You pay interest on the original amount and from the day you took the loan.
Often you won’t even have to wait till the end of the interest-free period. Even one delayed payment can cause you to end up forfeiting the offer. You will end up paying all the interest you were planning to avoid.
Other times you may plan to pay your monthly payments on schedule. However, a change in circumstances (a job loss, a medical emergency) could end up playing havoc with your well-intentioned plans.
So, be very diligent if you intend to make use of a deferred interest rate offer. Study the details, make sure you have a backup plan to pay off your cards in case of emergencies. If not, it is best to avoid these cards.
Evaluate using co-branded cards
Co-branded store cards offer a lower APR than stand-alone store cards. These come with a Visa, Mastercard or American Express label and can be used at any store that accepts these networks.
On the flip side, co-branded cards may not be as easy to get as a stand alone store card. Often their eligibility requirements are higher. Also, the rewards they offer are likely to be in the form of points and cashback rather than discounts or deferred interest rates.
How To Use A Credit Card Strategically For Rewards & Points
Types of rewards credit cards
Cash-back credit cards
You earn cash rewards for making purchases, typically around 1% of your purchase value. Some cards may offer higher cash-back percentages with higher spends.
General reward points credit cards
Instead of cashback, these cards offer reward points that can be accumulated and then redeemed against a variety of things that your card company offers.
Retail rewards credit cards
These cards are co-branded with a major retailer. It could be Amazon, Target or even Disney.
You can earn points on all your purchases and not just from the co-branded retailer. However, your purchases from the retailer earn you double or triple points.
Rewards points can be redeemed only on purchases from that specific retailer.
These earn you higher rewards on your gas purchases.
Gas cards can also be co-branded with a specific gas company. If so, you will earn at a much higher rate on purchases from that gas company.
Earning could be either as cash-back/rebate or reward points.
Airline miles credit cards
These can be either generic airline miles cards or airline-specific cards.
Generic cards will allow you to earn and redeem your points for air travel through any airline or travel site. Whereas an airline-specific card earns you points at a higher rate, though redemption is restricted to that airline itself.
These aren’t the only categories of reward cards. However, you get a general idea. Other rewards cards typically are a variation of these cards.
Let us see how to use a credit card responsibly while maximizing your rewards during this holiday season
Carry just a couple of credit cards.
It is tempting to apply for different credit cards because they offer attractive rewards in different areas. During the holidays, nearly every store will entice you to apply. Be strategic about the cards you own and use for different types of spending.
The key to maximizing rewards is to know what category are you going to be shopping for most – say travel or food. If you shop mostly at a store (say Target) then go for a store-specific branded card.
Think beyond just the Holidays
Consider your spending habits throughout the year and not just during the holiday season. For example, food may not be your biggest category during the holiday season. But, when you look at the year as a whole it may be right up there.
If you track your expenses, it will be easy for you to know what kind of reward cards you should go in for.
Know Your Reward Cards
There are lots of cards that offer some tempting rewards. But the fine print may include some limits. These include things like
- A limit on the maximum cash-back you can earn each quarter. Cards offering higher rates of cash-back (say 5%) are likely to cap it to $1500 of qualified spending each quarter. To know how much you have already spent on such purchases simply check your account online or call your credit card issuer.
- A limit on the number of years you can accumulate your points for.
- Having a minimum number of points before you can start redeeming them.
Savvy consumers also take advantage of double-dipping to maximize the rewards they earn. For example, you may be able to use your airline credit card to earn points and amass miles on the airline’s frequent flyer program.
Apart from airlines, online shopping portals allow you to earn card rewards and shopping points.
Another common double-dipping strategy is to sign up for a loyalty program. This could be either a multi-brand program or a retailer-specific one. Again, just make sure to do your research about the program and join only a couple that make the most sense for you.
Beware of annual fees
Many of the best cards charge annual fees. Make sure the card is really worth it. Often the cards may offer credits worth a certain amount of the fees charged or other benefits such as Priority Pass membership. If you don’t really travel that often or have access to airport lounges through another card then paying a fee for this card does not make sense.
Tips To Avoid Credit Card Debt This Holiday Season
Have a budget for your holiday and Christmas shopping
This is first, foremost, and absolutely essential. I cannot overemphasize the need to have a budget for Christmas.
Okay, I know I may have laid it on a little thick. But you get the point.
You need to know how much you can afford to spend. Consider how much money you can put aside after paying your regular bills and other expenses.
Here is a simple way to budget for your Christmas.
Save up before the holidays
Sinking funds are a great way to save up small amounts each month for Christmas and the holidays. They help you have a stress-free holiday season, avoid credit card debt and spend large, planned and saved sums of money without feeling guilty.
Plan and save for your Christmas sinking fund in advance. It is best to start in January itself.
If you haven’t set up one this year, remember to do so next year. It is easier to come up with $50 each month than $600 in 2 months at the end of the year.
Make a shopping list
I always say that lists help you save money.
Once you have a budget it is important to stick to it. Use your Christmas budget to make a list of things you need to buy (gifts, decor, food, wrapping paper, traditions) along with the amount of money you have budgeted for each of these.
Every time you go shopping, use your list as your reference. Avoid buying things that are not on your list or beyond the amount you have assigned for it.
A shopping list will help you stick to your budget and avoid getting into debt cause you know you have the money to spend only on certain things.
Make some cuts
Often, you may need to take a closer look at your shopping. See if you really do need to buy gifts for friends you haven’t met in years or family members who you never see.
Do you need to be in all the Secret Santa or gift exchange groups you are a part of?
Give the gift of your time instead of expensive things
Why not gift your time this year. Offer to babysit for a loved one or take kids out to the zoo or the neighborhood park.
Do you have a skill that you can offer? If you are a photographer, you could offer to take photographs of them. Maybe gift them a painting you made which they liked.
Make some freezer meals for the grandparents. It will be really appreciated.
Shop sales and pre-loved items.
If you have a limited budget then shopping sales or searching at the Salvation Army/Goodwill will help stretch your dollars further. You may be able to buy 3 gifts instead of two.
Use the internet to search for deals, coupon codes for everything you plan on buying. You can even sign up for apps like Honey which find the best coupon code and automatically apply it to your cart when you shop online.
Search sites like Groupon to find experiences you can gift.
Why not give homemade gifts for Christmas this year? These are thoughtful, creative and pocket-friendly. They are perfect for everything from Secret Santa to stocking stuffers. You find DIY gift ideas that are great for your boss, your colleagues, aunts, uncles, cousins, nephews, nieces, or as hostess gifts.
Talk to friends and family
It may be better to have an honest conversation with your family and friends about your budget rather than incurring expensive credit card debt.
You can mutually decide to skip gifting each other this year or agree on a spending limit. If there is a group of your friends or cousins, you could decide on doing a Secret Santa (with a limit) instead of buying gifts for everyone.
Get a jump on your travel plans
Flight and hotel prices can touch dizzying levels due to the holiday rush. You can avoid the crazy rates by planning and booking your tickets well in advance.
Even if you are planning to redeem your points to buy tickets it is best to act early. Airlines only have very limited seats that can be bought using miles or rewards. So secure them early.
Earn extra during the holidays
There are lots of opportunities to earn extra that open up during the holidays. The retail sector needs extra hands during the shopping season and lots of temporary holiday jobs open up at stores, malls, Christmas tree lots or with delivery services.
If you work flexible hours a week, check with your employer if you can work extra during this season to shore up your income.
There are plenty of side hustles and weekend jobs. Search the internet to find one that matches your skills and the time you have available.
Earning extra bucks gives you the money to spend with your credit card for the holidays. It can help you pay your entire credit card bill before it becomes due, thus avoiding expensive debt.
Applying For A New Credit Card – Things To Consider
The holiday season is notorious for the number of new credit cards you may be offered. Almost every store will lure you with attractive discounts. Credit card companies will offer tempting rewards. But do you really need another card?
Here are some things you should take into consideration before applying for another card.
How much debt you already have?
Are you already struggling to repay the debt you already have? If you are unable to pay your monthly mortgage or payday debt installment then maybe you can’t afford another card.
If you already have credit card debt outstanding then another expensive card will make things worse.
There are a couple of exceptions, though. First, if the new card allows you to consolidate your debt at a lower rate than your existing cards. Second, if the new card carries a zero APR. If it is a deferred interest rate then be sure you will be able to pay off your debt as per schedule. Even one delayed payment can result in high-interest retrospectively on your entire amount.
Applying for multiple credit cards
When you apply for multiple credit cards during a short period of time, credit score companies interpret it as a sign of financial stress which can adversely affect your credit score.
Your Credit Card Habits
When choosing a credit card, it is best to know your spending pattern and repayment ability.
If you are diligent about paying every bill in full before the due date then look for maximizing rewards, a longer grace period and zero annual fees.
If you want to stretch out the repayment of a big purchase you are planning to make on Black Friday, then a low APR or a deferred interest card may be best for you.
When Not To Use A Credit Card During The Holidays
It is better to use saved up cash instead of a credit card if
You already have credit card debt outstanding.
You are approaching the credit limit of your card.
In either of these scenarios, it is best to pack your credit cards away someplace where you cannot reach them. Stick to spending cash. But if you have been a responsible credit card user with no debt outstanding and low credit utilization, use the cards for the convenience and benefits they offer.
If you are diligent and responsible about how you use your credit cards then there is little reason to not use them this holiday season.