If you’re like most Americans, your credit cards are probably going to get a workout this holiday season. Spending on gifts, travel, and entertaining is a part of the festive season, and many people opt to charge their purchases.
Making holiday purchases on your credit cards can be a good thing because you can get credit card rewards for it. But, it can also put you at risk of financial trouble if you don’t use your credit cards responsibly. If you don’t want your credit card use to cause you problems, be sure to avoid these four credit mistakes over the holiday season.
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1. Charging more than you can pay back
It’s easy to get caught up in the moment and charge expensive gifts or costly holiday meals. Unfortunately, if you don’t have the cash to pay back your bills when the statements come, you won’t have a very happy new year. You don’t want to start off 2019 saddled with debt — and you don’t want every holiday purchase to cost you more because you get stuck paying interest.
The good news is that it’s easy to avoid these outcomes. Just set a budget for how much you can afford to spend and stick to it. You can track your spending manually by signing into your card’s online account and listing the holiday transactions on a spreadsheet. You can also use money management apps such as Mint, and label your holiday spending on your transaction list so you can see in a second how much you’ve already spent.
Once you hit your budgeted limit, stop charging more stuff for the holidays unless you can rework your budget and find more spare cash to ensure the bills are paid off.
2. Maxing out your credit cards
Using up all of the available credit on your cards could seem harmless if your goal is to charge as many of your holiday purchases as possible. The only problem is, maxing out your cards could hurt your credit score. That’s because the credit reporting agencies look at your credit utilization ratio and you get penalized if this ratio is above 30%.
Your credit utilization ratio is calculated by dividing the amount you’ve charged by your available credit. If you charged $500 on a card with a $1,000 limit, your utilization ratio is 50%. Ideally, you want to keep the ratio as low as you can to get the best credit score — you definitely don’t want to max out the cards.
3. Signing up for a store card
It’s common at the cash register for store clerks to ask you if you want to sign up for a credit card. Many stores offer special promotions if you do so — especially around the holidays. If you’re making a big holiday purchase and you’re told you could save 10% just by opening a store card, you may be really tempted to fill out an application.
But there are a few reasons you should resist. One big issue is that opening the store card will lower your credit score. You’ll get a new inquiry on your credit report when you apply for the card and the inquiry will stay on your credit report for two years. Too many inquiries reduce your score.
You’ll also have a brand new card, which lowers the average age of your credit accounts. Average age of credit is another big factor that determines your credit score, and older is considered preferable so you can show you have a long history of being a responsible borrower.
Finally, you should resist signing up for store cards because you’ll usually be inundated with coupons and special offers once you have a card. This may seem on the surface as though it’s a good thing, but it can prompt you to spend money by making purchases you otherwise wouldn’t have.
You don’t need the temptation — or the hit to your credit — that comes with opening a store card, so just say no if you’re asked to do so.
4. Failing to take advantage of credit card rewards
While you don’t want to overuse your credit cards during the holidays, you do want to use them. If you use them in a smart and responsible way, you should be able to earn lots of credit card rewards.
To max out the rewards you earn this festive season, make sure to use the right card at the right store. If one card gives you bonus points for gas, consider using it to buy gift cards from a gas station if you were planning on giving gift cards as gifts. If another gives you points for dining, charge some restaurant gift cards to present to those people who you aren’t sure what to buy for.
Shopping through your credit card company’s online portal — if it has one — can also lead to bonus rewards, and many card companies have special offers you can sign up for online to boost your rewards points even further. If you’re not sure if your card has an online portal or special offers, sign into your account to find out or call the creditor and ask so you don’t leave free money on the table.
The holiday season doesn’t have to lead to credit mistakes
Now you know some of the key credit mistakes to avoid when you do your shopping this holiday season. You can take steps to ensure you don’t make these common errors so you can use your cards in a way that benefits you. Your holiday will be a little merrier when you’ve maxed out rewards but avoided paying interest on purchases.
View more information: https://www.fool.com/the-ascent/credit-cards/articles/dont-make-these-4-credit-mistakes-over-holiday-season/