Summary
The holidays are an exciting time of year, but they can take a financial toll on any family. Nearly every year, the average American household’s debt increases by over $1,000 during the winter months as they rely on credit to pay for holiday expenses. For many, this debt gets accrued on high-interest credit cards. Over time, the interest can add hundreds, if not thousands, of dollars that must be paid back. As you look ahead to this year’s holiday festivities, let’s talk about whether you should use your credit card to pay for seasonal expenses.There’s No Universally Correct Answer
Contrary to popular belief, credit cards are not an inherently bad option. They can provide tremendous financial flexibility. Some offer bonuses or rewards, and, when used responsibly, they can help raise your credit score and ensure a more secure financial future. For some, credit cards can be a means to an end, such as receiving added consumer protections or in-store discounts. Others find themselves drowning in credit card debt and struggling to meet their monthly payments. Regardless of which side of the spectrum you're on, you can always change old habits and improve your situation. Let’s start by weighing the pros and cons of charging your holidays on credit.
When Using a Credit Card Makes Sense
Depending on your financial situation, using a credit card during the holidays can work in your favor. Let’s take a look at a few scenarios in which it could be in your best interest.
When You Have a 0% Interest Promotional Offer
The First Service Visa® credit card boasts a 6 month period of 0% introductory APR on purchases and transfers. This can help you spread out your holiday expenses and avoid paying interest on them. That can seem especially appealing if you’re in the early stage of your career and counting on a pay boost or a bonus after the next flip of the calendar. Proceed with caution when considering these promotional offers. If you can't pay it off before the promo ends, you may face back-interest payments and additional fees.
When You Earn Reward Points, Miles, and Cashback
Points, travel miles, and cashback offers lure many Americans into taking out credit cards for the perks they might earn. These incentives are great rewards for those who are responsible and maintain a low balance from month to month. As long as the value of the benefits outweighs the cost of interest payments or card fees, the consumer can come out ahead.
Conversely, many people bite off more than they are prepared to chew in their quest for these rewards and end up struggling with debt that won’t be paid off easily. Such credit cards can be a double-edged sword, so it’s important to do the math and calculate whether the potential gains are truly greater than what the card may cost you.
When You Can Receive Additional Buyer Protection
Consumer protection programs are a big reason why many people prefer to make holiday purchases with a credit card instead of using cash or debit cards. It can vary from card to card, but some offer built-in product warranties that can exceed in-store or even manufacturer's warranties. Some credit cards may also give you added protection against theft or damage for the things you buy during a qualifying period.
When You Can Reduce Your Liability for Unauthorized Purchases
It’s common knowledge that fraud attempts rise significantly during the holiday season. Using a credit card can limit your liability for unauthorized purchases. While debit cards can offer protections of their own, it may take weeks to get your money back into your checking account. This is another way that setting up your card in a mobile wallet can help, whether you plan to use debit or credit.
PRO-TIP
You may be able to achieve comparable consumer protection using a mobile wallet regardless of whether you’re paying with a credit or debit card.
When You Should Avoid Paying with a Credit Card
If you are looking for reasons to keep your credit card in your wallet this holiday season, you won’t have to look very far. Millions of Americans live with credit card debt, and many of them have no realistic plan for paying back what they owe. Credit cards can be helpful if used wisely, but when it comes to reaching your financial goals, they are no match for building good personal spending habits and maintaining a reasonable budget. Here are four scenarios where using a credit card does not make sense.
1. When You’re Already Struggling with Credit Card Debt
By some estimates, the average American carries a credit card balance of around $6,000. This can easily amount to thousands of dollars coming due each year in interest payments alone, which can greatly hinder your ability to pay off the principle. If you are already carrying a credit card balance, you should probably think twice before piling on even more debt.
PRO-TIP
If you’re already playing catch up with your credit card, you may be able to make some headway by rolling over your balance to another card with better rates - especially if it doesn't cost you any new fees.
2. When the Holiday Deals Aren’t what They Are Cracked Up to Be
Holiday deals are a staple for many of us. Popular electronics, clothing, toys, and other merchandise may fly off the shelf once the price is discounted, but the lower up-front cost doesn’t always translate to actual savings. If you are using your credit card to take advantage of these deals, you may end up paying more in interest than what you saved at the register.
For example, let’s say that your dream television has been marked down from $3,000 to $2,500. If you purchase that TV with a credit card that charges an 18% APR, and you make a minimum payment of $75 per month on that card, you’ll end up paying $990 in interest over nearly four years. You saved $500 up front, but it cost you an extra $990 in interest and possibly even more with additional credit card fees. That’s not much of a deal at all!
PRO-TIP
If you are considering a major purchase this holiday season, apply for a personal loan first. Because of the way each loan type is designed, you will likely get a better rate with more flexible terms with a personal loan. That means that even if you carry a balance into the new year, you will have a much better chance of paying it off in a timely manner.
3. When Your Eyes Are Bigger than Your Budget
When paying with a credit card, it can be easy to lose track of how much you’re spending. Since no money is actually leaving your bank account right away, you could keep saying yes when you should probably stop swiping. For many people, spending money feels more tangible when they’re counting out cash, so using a credit card can lead to overspending – especially in the midst of the holiday season. You know what you can reasonably afford to spend, but you might not realize you’ve hit that threshold if you aren’t watching closely.
4. When You Are Making Impulse Purchases
One of the great advantages credit cards offer is financial flexibility. Unfortunately, that flexibility can turn into a false sense of security for many. Impulse buying is one of the biggest threats to maintaining a successful budget, and we are especially prone to giving in when we know that the expense can be spread across a few months. Don’t fall for it! Just because something catches your eye, you probably shouldn’t buy it if you do not have the wiggle room in your budget.
PRO-TIP
Because temptations like these are bound to come up, it’s always wise to have a little extra available for the occasional unexpected expense. When calculating the cost of everything on your holiday shopping list, add an extra 10% into your budget if you can afford it, and shop knowing that a single indulgence won’t necessarily wreck your entire plan.
The Best Way to Stay Out of Trouble this Holiday Season
Whether or not you're confident that you can responsibly use a credit card to cover your holiday expenses, remember to keep your perspective. The holidays will come and go, but you have short-term and long-term financial goals, and it’s important for you to decide where the holidays fit in.
Once you’ve decided what you want from the holiday season, we always recommend making a plan. For example, if you know you want to set aside $2,000 to use on gifts, holiday travel, and other seasonal expenses, you might open a holiday club savings account and add $200 per month to the account from January to October. In November, you will have set aside your desired amount to use throughout the holiday season without disrupting your regular month-to-month budget in November and December.
Get Started on Saving for the Next Holiday Season
Stop by one of our 14 Houston-area branches, give us a call, or quickly apply online to get started.