It’s tempting to use plastic to pay for holiday purchases. And that’s not necessarily a bad strategy, as long as you take some sound advice with you to the mall along with your naughty and nice list.
These tips will help you use your credit cards to your advantage, should you decide they’re the best option to pay for holiday gifts, gadgets and trinkets this year.
Don’t shop without knowing your balance.
If you don’t know your balance, you could exceed your credit limit while you’re shopping, and that can get costly. That’s because you risk having a credit utilization ratio that’s very high.
“Your utilization ratio is the amount of credit you’ve used to the amount of credit you have available. For example, if you have a $1,000 across all your credit cards, and you have $300 of debt, then you’ve got a 30 percent utilization ratio,” says Beverly Harzog, a consumer advocate and credit card analyst/expert in Atlanta, Georgia.
So if you max out your card, you’re going to increase your ratio. Going above 30 percent can have a negative impact on your credit score, warns Harzog. “Your utilization ratio makes up 30 percent of your FICO score. That’s significant!”
“To be able to exceed your credit card limit, you have to ‘opt in’ and be willing to pay an over-the-limit fee, which averages around $29 to $39,” says Harzog. To find out what the fees apply, check your credit card’s terms and conditions disclosure statement.
If you haven’t opted in, your credit card will be denied at the register. “It’s best, of course, to avoid going over your balance, so opting in isn’t something I’d recommend,” says Harzog.
Brush up on your rewards
Harzog cautions that too many shoppers could be unnecessarily spending money at the mall this year because they’re not tapping into unused rewards lurking around to offset some holiday gift expense.
“You can use reward points for all kinds of gifts,” she says. “I do all my holiday shopping with a rewards card because I want the cash back.”
But Harzog also says she doesn’t carry a balance on her rewards cards and she doesn’t charge more than she can pay in full when the bill arrives. “Rewards cards have higher APRs so if you carry a balance, you’ll just wipe out your rewards. That’s why I don’t carry a balance on those cards.”
Be wary of helpful cashiers
Holiday check-out lines are stocked with smiling sales people offering you discounts, bonus points and so on if you opt to open – and charge your purchase – a new store credit card.
These cards have high interest rates and applying for one can ding your credit score a little.
Harzog suggests reading – not skimming – the card’s disclosure statements before agreeing to that 10 or 15 percent off your purchase. “Check the purchase APR, how long the grace period is so can avoid paying interest, if there’s an annual fee, and if there are any other fees that come with the card,” she cautions.
For instance, getting 10 percent off of a $100 flat screen creates a “sale price” of $90. That, plus applicable sales taxes, is charged to your new account that has a whopping 21 percent APR. Unless you pay off the entire balance when the first bill arrives, that discount will be costly. If you pay only the minimum monthly payment (in this case about $10) the price for that “sale” TV just jumped to about $107 the 31 days after you bought it. That’s $7 more than if you never opened the card and just paid the full non-promotional price. Now imagine that on a larger purchase amount, like $500, $1000 or more.
Many cards charge 22.9 to 26.99 percent APR so that checkout ‘discount’ could cost you double – or more – than if you paid full price depending on how long it takes you to pay off the card’s balance.
“If you’ve read the disclosure statements and it looks like you’ll benefit from the card, then go ahead and apply. But don’t apply for a store credit card unless you make a vow to yourself that you’ll never carry a balance,” says Harzog.