Did it sneak up on you too? The holiday season is almost upon us—and that means holiday shopping, and a lot of it. Many consumers will spend more on credit cards in the last five weeks of the year than they spent during the first forty-seven. That can be bad news if you don’t have a plan in place, so here are three pieces of financial advice that can save you big bucks during and after the upcoming holiday season.
Let your credit card issuers pay for gifts.
If you haven’t claimed your rewards from credit or debit card usage for the past few years, you’re not alone. Many of us overlook the fact that points, miles and cashback rewards have accrued to the point where we have quite an attractive bounty ready to be claimed.
When it comes to gifts, nothing beats a good gift card and that’s exactly what your credit card usage can be redeemed for. Gasoline gift card, retail store gift cards, Fandango, iTunes Store, Amex gift cards—the list of great gift card options goes on and on. And you can claim many of these with as few as 2,500 points in your rewards’ programs.
Finally, don’t assume your airline miles have to be used for airline tickets. Delta Airlines, for example, has their SkyMiles Marketplace, an online store where your miles can be used to purchase everything from electronics to food and wine to books and kids apparel. And yes, you can also choose from several gift card options.
Choose the right credit card.
If rewards aren’t going to help you with your holiday shopping then a credit card isn’t a bad way to go. You get significant protections thanks to the Fair Credit Billing Act and it’s a better way to shop in lieu of cash or debit cards, assuming you’re responsible. When it comes time to whip out a card, think about choosing the card with the highest credit limit.
One of the most important measurements in your credit scores is the relationship between the balances on your credit cards and the limits on your cards. If you choose a low limit card, like a retail store card, and leverage it heavily your credit scores will likely suffer. If, however, you choose a general use credit card with a hefty credit limit those same purchases will be much less damaging.
Don’t let your holiday shopping linger in the form of higher interest rates.
If you use credit cards to make holiday purchases, good for you. If you’re going to pay the cards off by the end of January, good for you. If you’re going to pay them off before the statement closes in December, you’re a credit card rock star. Why? Because the balance will never show up on your credit reports.
Still, many consumers will let their holiday debt linger into the New Year and struggle to pay it off. It’s one of the most common New Year’s resolutions: Get out of debt and do it now. One of the primary reasons it’s right up there with “lose weight” is because some people get into the same trouble every year.
If you know you’re going to finance something expensive as soon as 2013 hits and you know it’ll take some time to pay off your credit cards, consider using a less attractive payment option, like cash or debit. You don’t want presents to cause you to pay a higher interest rate on something like a car or home loan because your credit score took even a little hit.
For example, the average interest rate on a mortgage loan for someone with a FICO score of 700 is a little under 3.3 percent. The same mortgage for someone with a FICO score of 690 is a little under 3.5 percent. The difference doesn’t sound meaningful until you apply dollars and cents to the difference. At a 3.5 percent interest rate, a $300,000 mortgage will cost you around $30 more per month than if your rate was 3.3 percent. That’s $360 per year for every year you have the mortgage. All of a sudden, those holiday gifts seem a whole lot more expensive.
The bottom line? A little foresight can make a big financial impact when it comes to holiday spending.
John Ulzheimer is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO and Equifax, John is the only recognized credit expert who actually comes from the credit industry. He is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling. Follow him on Twitter »