Using credit to tackle your holiday shopping can be tempting. And offers of a discount for opening a new account, or interest-free purchases for a year or more make it more enticing.
But relying on credit without a plan to pay off the debt quickly can easily cost you more in the long run. Carrying higher balances for several months could lower your credit score, making it more expensive to refinance your home, buy a car or qualify for other loans.
“No amount of rewards are going to be worth using a credit card and carrying a balance from one month to the next,” said Bill Hardekopf, CEO of LowCards.com, which tracks credit card offers. “There’s no credit card that pays you 12 percent or 15 percent or 18 percent back in rewards.”
Even so, many shoppers will reach for a credit card this holiday season.
A recent survey by the National Retail Federation found that about 38 percent of consumers planned to rely on credit to buy their holiday gifts. That’s up from 28.5 percent last year and the biggest share in the survey’s history.
Here are three tips that can help you avoid ending up with a debt hangover this holiday season:
1. Read the fine print
This time of year, credit issuers and retailers roll out cards with special discounts and interest rate grace periods in a bid to woo borrowers. If you can’t resist applying, be sure to read the fine print that spells out the limits on these perks, as well as circumstances that could trigger higher charges or annual fees.
Take Macy’s and Kohl’s. Customers who are approved for a card from either of the department store chains receive a variety of discounts. With the Macy’s card, new cardholders receive 20 percent off, but the savings max out at $100.
Consumers who open a Kohl’s credit card account receive 15 percent off on their next purchase and a 20 percent discount when they receive the card. In addition, the card entitles borrowers to at least 12 annual discounts ranging from 15 percent to 30 percent on select merchandise.
Macy’s lists an annual percentage rate of 24.5 percent for purchases on its card. Kohl’s advertises a rate of 23.99 percent. That means those discounts may not be so wallet-friendly should you carry a balance beyond a month or two.
Then there are the cards that offer zero percent interest on purchases for a year or more. They can save you money over time. But often just being late on a single payment is enough to end the interest rate grace period, wiping out your initial savings.
“Often, if the balance is not completely paid off prior to the expiration date of the time period, a high interest rate is charged going back to day one,” said Ray Benton, a certified financial planner based in Denver.
If you’re considering using a card offering zero interest on purchases for a period of time, try this: Take how much you would charge on the card and divide it into monthly payments within the interest-free period.
This can help you determine whether you can comfortably afford to pay the balance off before the regular interest rate kicks in. If that payment schedule is too much of a financial squeeze, it’s likely you’ll end up paying interest charges.
2. Cash in rewards
If you’ve been accruing rewards points on one of your credit cards, you may have already earned enough to buy gifts this holiday season.
Some cards offer cash back, credits against your balance or even special deals to buy gift items from a points redemption store. Major card issuers such as American Express, Chase, Citi and Discover offer some type of points reward program.
3. Have a repayment strategy
Establish a budget for how much of your holiday shopping you can put on your credit cards and still afford to pay off any balance within a realistic, but expedient, period of time.
That should also help limit your spending and provide a roadmap for paying off your card balances.
Hardekopf also says if you are going to carry a balance, contact your issuer and ask for a lower rate. There is no guarantee that it will be lowered, but it never hurts to ask.