It’s that time of year again, and the holiday shopping season is in full swing. If you’re like most people, you probably charge at least a few seasonal purchases to a credit card, and that’s not always a bad thing. Using credit cards in a responsible way can improve your credit score, open up job opportunities, help you qualify for housing and even get you better rates on insurance.
On the other hand, credit cards can also be a major temptation to spend money on items you cannot afford. However, sticking to a few guiding principles and staying vigilant can help you successfully use credit cards to manage your finances and reap a few rewards along the way.
The first question to ask is which card is right for you? There are several factors to consider when looking for a card that best fits your needs. Whether you are researching credit cards online, contacting your local financial institutions or sifting through offers in the mail, it helps to make a chart to compare the annual percentage rate (APR), grace period, fees, credit limit and any rewards or perks offered by the card. If you tend to carry a balance from month to month, you might prefer a card with lower interest, but fewer rewards options. Alternatively, if you pay your balance regularly within the interest-free grace period, you could consider a card with a higher APR, but more rewards.
Regardless of what card you choose, studies have shown that people tend to spend more when using plastic instead of cash, so it can be very easy to go overboard charging your holiday shopping to your card. The best way to handle extraneous expenses, like gift purchases, is by using a monthly spending plan to determine the amount you can spend each month. If you’re easily tempted, sometimes the smartest way to spend is using cash rather than a credit card.
If you do decide to purchase with a credit card, how much debt is ok? A general rule of thumb is that no more than 15 percent of your take-home pay should be going toward paying carried-over balances on unsecured debt payments like credit cards or personal loans. For example, if your take-home pay is $3,333 per month, your unsecured debt payments should be no more than about $500 per month.
As much as we want to please our friends and family over the holidays, ensuring we keep debt manageable is the best way to take care of ourselves and the people we love.