Smart Holiday Shopping Strategies With Credit Cards
Previous weeks we have discussed how to be more efficient by planning our purchases before heading out to the stores or shopping online. Holidays are a time for spending, it’s almost unavoidable, but how we spend is up to us. How many times have you been asked if you are paying with “credit or debit?” It happens so often you probably don’t even think about it, but how you answer that question can determine how much you will really pay for a purchase.
Answering “debit” is like paying cash. If we choose “debit” we have the money taken immediately from our account. The benefit is the avoidance of interest accruing on the unpaid balance on a credit card. The same discipline required when spending cash is necessary when paying by debit. What do I mean by discipline? The practice of only buying something when you can afford to pay the entire amount at the time of purchase.
If we buy something knowing we cannot pay for the entire purchase right away then it is tempting to use credit. Paying for holiday gifts in this manner can be very costly over time if the purchase is not paid off immediately. If something is paid using a credit card and that full amount is not paid off when the next bill arrives, the actual price paid will be higher. Why, because the actual amount is not only the purchase price but the interest paid to the credit card company.
According to a rate survey by creditcard.com in 2017 the national average for credit card interest was 16.51%. Consider a purchase for $1000 put on a credit card at 16.5%. When the bill comes in January the decision is how much to pay? Credit card companies will have a minimum payment due which is typically around 1-2%, or $25 whichever is higher. (www.nerdwallet.com). If you only pay the minimum due you will pay approximately $13.75 that month in interest. It might not sound like a lot, but over the course of a year you could pay an additional $165 in interest by only paying the monthly minimums.
Since some holiday spending will include purchases made using credit cards, in the spirit of “recalibration” we should discuss the responsible use of credit cards before you start shopping.
3 numbers to know
1. Know your credit limit. The limit is determined by the credit card company, although you may decrease the limit or request an increase. This can easily be found by looking at a recent credit card statement.
2. Know your credit card account balances. You do not want the embarrassment of a card being declined because you have exceeded your credit limit. Even worse, charging close to or “maxing out” a card will negatively impact your credit score.
3. Know your credit score which is partly determined by how much is charged compared to the credit limit. That is called your credit utilization and the lower the balance on the cards the better for your score.
3 credit card strategies to use
1. Beware of signing up for store credit cards. Stores make credit card offers to entice shoppers to spend more. Remember the credit card company and store might offer a tempting deal if you sign up but read the fine print to see the interest rate and terms. Beware of introductory interest rates that increase dramatically or annual fees due on the card.
2. Avoid making late credit card payments. One technique to avoid doing so is to set up automatic payments for the minimum on or before the due date. An additional payment can always be made during the month, but a late payment will be avoided.
3. Avoid minimum payments each month. While it is prudent to set up an automatic minimum payment, let that not be the only payment. Plan on paying off a purchase as soon as possible to avoid paying unnecessary interest.
Since we are halfway through our series to help moms Recalibrate in 2018, next week I will have tips to help track your progress so far!
Asalyn Coachman is a Registered Representative of and offers Securities through The O.N. Equity Sales Company, Member FINRA/SIPC, 39395 W Twelve Mile Rd., Ste 102 Farmington Hills, MI 48331 (248) 482-3600. Investment Advisory Services offered through O.N. Investment Management Company. Financial Architects, Inc. and Mother Honestly are not subsidiaries or affiliates of The O.N. Equity Sales Company or O.N. Investment Management Company