Plan carefully so credit card debt and ID theft don’t dampen your holiday cheer.
By: Meghan Alard of Consolidated Credit
According to the National Retail Federation, the average family expects to send over $1,000 this year – $1,007.24, to be exact. That’s an increase of 4.1% from last year.
There are three big categories of spending this year:
- $637.67 on gifts
- $215.04 on non-gift items, including food, decorations, and cards
- $154.53 on non-gift purchases that take advantage of holiday promotion deals, like Black Friday
Gifts break down like this:
- $506 on gifts for family
- $74 of gifts for friends
- $26 on gifts for coworkers
- $31 on gifts for others, such as pets and self-gifting
Tip No. 1: Start shopping now to spread out the cost of your holiday budget
Not only do holiday shoppers plan on spending more this year, but they’re also shopping later. The NRF found that 60% of shoppers have waited until at least November this year to start shopping.
“I think at least some shoppers are getting tired of retailers starting holiday promotions earlier and earlier every year,” says April Lewis-Parks, Financial Education Director for Consolidated Credit. “But the earlier you start shopping, the more paychecks you have to spread out the cost. This will help you stick to cash instead of pulling out plastic for your holiday expenses.”
The idea is to work out your holiday budget, making sure to include all the expenses you need to cover. That includes not only gifts but decorations, food, postage and shipping, travel expenses, hosting expenses if you’ll have guests and money to cover any costs for holiday parties.
“Once you know how much you need to spend and what you need to buy, you can divide and conquer,” Lewis-Parks continues. “Take some time this week to look at deals coming out for Black Friday and Cyber Monday. These two shopping days are usually the best time to buy gifts. Decorations get cheaper the closer you get to Christmas. So, you probably don’t need to rush out and buy those this weekend unless you plan to deck the halls over the next few days.”
Tip No. 2: Consider non-holiday purchases carefully, even if they offer big deals
“According to the NRF, the average household will spend over $150 for non-holiday purchases to take advantage of big discounts offered on Black Friday and Cyber Monday,” Lewis-Parks continues. “And that’s just the average. If you’re going out to purchase electronics, your personal non-holiday tab will be much higher. But be careful that you’re actually getting a good deal and that you’ll be able to pay off the purchase quickly. Otherwise, if you’re only making minimum payments, then monthly credit card interest charges will quickly offset those Black Friday savings.”
For example, let’s say you spend $1,000 on electronics on Black Friday and you save $100 on your purchases. But you put the purchases on a credit card with 20% APR because you can’t afford to make it in cash. If you only make minimum payments, it would take 128 months to pay off the balance in full. You’d pay $1,196.95 in interest charges. That’s right – you’d more than the original amount purchased on accrued monthly interest charges. In other words, you saved $100, but you spent $1,196.95 extra. That’s not exactly saving money.
Tip No 3: Be strategic about using credit cards this season
Credit cards can be an extremely useful tool during the holidays. However, they also make it easier to overspend and amass high interest rate debt that’s tough to pay off. But when used correctly, you can maximize the rewards you earn while you minimize interest charges and the risk of debt problems.
Use these tips to help you avoid a holiday debt hangover in the New Year:
1: Start with zero balances
Credit card rewards are quickly offset by interest charges brought on by high credit card APR. However, there is a way to use credit cards interest-free. If you start a billing cycle with a zero balance, then pay off all the purchases you make within that billing cycle, no interest charges apply. So, in order to ensure the 3% cash back that you earn isn’t offset by 20% APR, you must start and end the billing cycle at zero.
If you don’t do this, interest charges will offset any rewards earned within 2-3 billing cycles, depending on your APR. In this case, it doesn’t make sense to use a rewards credit card. You don’t actually earn anything overall and they tend to have higher interest rates. That means it will cost more money to eliminate the debt.
2: Aim for low APR if you won’t pay off the balance quickly
If you purchase a big-ticket item that will take some time to pay off, don’t use a rewards credit card. The same is true for making a series of purchases that will need to be paid off over time. If it will take more than 3 billing cycles to pay off
a debt, don’t bother with a rewards credit card. Instead, opt for your credit card with the lowest APR. That way, it will cost you less money to pay off the debt as you work your way back to zero.
If you plan to travel for the holidays and have a travel rewards card, use it to book reservations so you can earn miles. If you have cash back or point rewards cards, use them strategically and only when you can pay off the balances quickly.
Check the rewards program and only use the card when you can earn the maximum rewards.
4: Consider using PayPal or prepaid for online shopping
More and more, people are opting for online shopping instead of hitting the store. But the busiest online shopping season of the year also means it’s the worst time for identity theft. The last thing you need on top of your holiday spending is the hassle of dealing with identity theft. But there are some easy ways to mitigate or at least minimize that risk.
One way is to use an online payment processing service like PayPal. If a retailer gets hacked or your transaction isn’t secure, the thief still can’t access your PayPal unless they also have your login and password. Even if they do, they only have access to the funds loaded on your account. If you keep this amount limited, then it also limits your risk.
If you don’t use PayPal, consider getting a prepaid credit card. This is a card that functions like a debit card. You load the card with funds and then purchases are deducted from that amount. The difference between prepaid credit and debit is the liability you have if someone hacks your account. With a credit card, liability is always limited to $50. However, with debit, the liability limit depends on when you report the theft.
- If you report it within two days, it’s also $50.
- However, if it’s after two days but within 60 days, that jumps to $500.
- And if you report the theft after 60 days, there’s no liability limit. In other words, you could be on the hook for the entire theft
This is why you should never shop online with a debit card. It’s usually just not worth the fraud risk. Prepaid credit is best because you have limited fraud liability, PLUS, the thieves can only drain the funds you have loaded on the card.