6 Credit Card Traps To Avoid During the Upcoming Holiday Season
Credit cards can make holiday shopping easier, particularly when you’re juggling gifts, travel, food and other seasonal expenses. But it’s also easy to overspend.
This doesn’t mean consumers necessarily need to avoid credit cards altogether. However, they should be aware of common holiday spending traps that can turn purchases into debt you’re still paying off well into the new year. Here are six to keep on your radar.
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1. Confusing an Affordable Payment With an Affordable Purchase
One of the biggest holiday credit card traps is focusing on whether you can make the monthly payment rather than whether you can afford the purchase itself.
Michael McAuliffe, president and founder of the nonprofit Family Credit Management, said that buying one $50 present for one person and then another may seem manageable at the time, but “by the time you've shopped for several or even dozens of people, your credit card's out of control.”
Additionally, people often tell themselves they’re going to either pay off the card or they simply pay the minimum payment, and then the debt stacks up. “[N]ow you're paying ridiculous amounts of interest on those gifts you couldn't afford in the first place,” McAuliffe said.
2. Underestimating How Much Interest Can Add to Holiday Purchases
Holiday purchases become considerably more expensive when balances carry over into the new year. Austin Kilgore, analyst with the Achieve Center for Consumer Insights, broke down some hypothetical math:
If you have a $5,000 credit card balance, with an interest rate of 22% and make standard payments of interest plus 3% of the balance, it would take four years to pay off, with total interest paid of $2,798.
That means gifts bought during one holiday season could still be costing you money several holidays later. Holiday shoppers should look at the card's annual percentage rate (APR) before spending and have a realistic payoff plan for anything they charge.
3. Opening Store Cards Just for the Holiday Discount
Getting 15% or 20% off a large holiday purchase can sound like a great deal, but opening a new store card solely for an up-front discount can backfire if the card carries a high APR, McAuliffe said.
“Before you open one, you really need to ask yourself if you actually need another credit card, because the more credit cards we have, the more we lose track of what we're spending,” he said.
There’s also a potential consequence to your credit, because opening a store card requires a hard inquiry, “which can ding your credit score,” Kilgore said. “This becomes especially bad if you are checking your eligibility at multiple stores during the holiday season,” he said.
4. Stacking Buy Now, Pay Later Plans
Splitting a $100 purchase into four smaller payments in the form of buy now, pay later (BNPL) charges can make it feel less expensive up front, "but open five or six and you’ve got a mess on your hands,” McAuliffe said.
BNPL can have advantages over revolving credit because many plans are short-term and don't allow debt to linger indefinitely, but Kilgore warned against the complexity creep.
“Due dates can make your financial life complicated, as payments don’t line up monthly or with other regular payments in life,” he said.
5. Chasing Rewards, Points and Sign-Up Bonuses
Cash back and points often encourage consumers to pay with credit, which is useful when you're buying something you already planned to purchase. But they become a trap if they cause you to change your budget.
"The lure of rewards can encourage consumers to spend on things they don’t really need,” Kilgore said.
It’s best to stick to your holiday budget and maximize rewards on those purchases, rather than allowing rewards to determine how much you spend.
6. Letting Holiday Spending Push Your Card Balance Too High
Even shoppers who plan to pay off their cards should keep an eye on rapidly rising balances, Kilgore said. Heavy holiday spending can increase credit utilization, while opening several new accounts can add hard inquiries and reduce the average age of your accounts.
Rather than relying on a universal utilization percentage, however, he recommended focusing on what you can actually afford.
“You never want to charge more than you can pay in full and on time with each bill, so it’s important to track your purchases online as you make them,” he said. Everyone should know their budget limits.
The biggest holiday credit card trap may simply be allowing the payment method to dictate what you can afford. A credit limit, installment option or attractive reward doesn't increase the amount available in your holiday budget.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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