Photo: By Peter Hilton on flickr
With the holidays fast approaching, consumers have a lot on their minds. This time of year generally signals both increased spending—with gifts to buy and family dinners to throw—and heightened stress levels—brought about by the presence of in-laws and the state of the economy.Similarly, how holiday spending will be financed is a chief concern. Many consumers choose to fund this spending with a credit card because it precludes the need to carry around cash and easily facilitates online shopping, which comprises a bigger portion of the retail market each year.
However, some people also use credit cards because they figure they can spend now, have a happy holiday and worry about payment later. This is unquestionably a bad idea and can lead to costly debt. Still, this is not the only credit card mistake that people make during the holiday season. Therefore, to help consumers navigate the holidays in a financially responsible way, we compiled a list of the 10 biggest credit card mistakes and how to avoid them. After all, your credit card should not be on the list of holiday stresses.
1. Carrying a balance with a small business credit card
The holiday season means increased spending for a lot of small business owners because of the need to accommodate increased demand.
When making purchases, small business owners must use their credit cards strategically. The new credit card law (CARD Act) prohibits credit card companies from increasing interest rates on existing balances that are held on personal credit cards until a customer is 60 days delinquent. The same protections are not conferred upon business credit cards, however. Thus, carrying a balance on a business card is dangerous because the interest rate applied to it can change at any time, altering the cost of the debt. This fact is risky not only corporately but personally as well because in most cases a small business owner is personally liable for any charges made on a business credit card.
Still, business credit cards do allow owners to easily track business spending and give cards with individualized limits to employees.
In order to garner the benefits of each, small business owners should use personal and business credit cards in concert. Purchases that will lead to an owner carrying a balance should be made with a personal credit card with all others being funded by a business credit card.
2. Misusing a credit card abroad
If a trip abroad will be part of your holiday plans this year, there are a few things you must be mindful of. Before leaving, make sure your credit card does not have any associated foreign transaction fees. If it does, apply for the best no foreign transaction fee credit card in time to get it before departure. In addition, ensure that your credit card network is accepted at your destination and notify your credit card company of your plans so your card is not suspended for suspicious use. Finally, never accept merchant offers to have purchase amounts translated into U.S. dollars because they typically charge high exchange rates to do so. Following these tips will help prevent unwelcome financial surprises after returning home.
3. Spending beyond your means
While the concept of not spending more than you can afford to pay seems simple enough, many people do not adhere to it—either because they think they can spend now and worry about payment later or because they overestimate what they really can comfortably afford. Outspending one’s needs is especially prevalent during the holidays as family pressures and parental duties often prove more influential than the thought of potential debt. While you should obviously try to give your kids a happy holiday, try to do so in a fiscally strategic way and hunt for deals. Above all, determine the amount you can pay comfortably and do not exceed it. If necessary, save during the weeks leading up to the major holidays in order to concentrate funds on gifts and other expenses. Additionally, use a credit card payoff calculator in order to determine the payments necessary to completely pay for a large purchase in a reasonable amount of time.
4. Exceeding credit limits
During the holidays, it may be tempting to exceed your credit limit in order to finance both regular spending and gifts. However, doing so would be ill-advised. The CARD Act requires users to opt-in for the ability to exceed their credit limits, and while doing so is a good idea in case of emergency, it is also potentially dangerous during a period of expected high credit use. Exceeding your credit limit can trigger expensive fees and costly rate increases and is not worth the risk for casual spending. Therefore, protect yourself financially this holiday season by opting-out of the ability to exceed your credit limit.
5. Opening a credit card unnecessarily
With mortgage rates at record lows, many people are considering refinancing their mortgages or purchasing new homes. In order to increase the likelihood of approval or lower the cost of a potential mortgage, you must maintain the highest credit score possible. Therefore, it is important that you not get tempted to open a credit card this holiday season for the sole purpose of acquiring an accompanying discount or one-time gift. Each time you open a new credit card, you run the risk of causing short-term damage to your credit score, which would, in effect, make it more difficult to garner things that require good credit, such as a mortgage or a car loan.
6. Taking out cash advances
Cash advances represent one of the most costly things you can do with a credit card. The fees for a cash advance are often high and interest rates, generally above 20%, begin to accrue the very day you take out the advance. Thus, cash advances should only be used in the case of a true emergency.
7. Paying high interest
If you foresee your holiday spending causing you to carry a balance for at least a few months, make sure your credit card has the lowest interest rate possible. There are many 0% APR credit cards available and simple research will help reveal whether you are eligible for any. Additionally, if your interest rate was increased as a result of past payment issues, you can request it be lowered after six months of on-time payments.
8. Misunderstanding payment allocation
There is a simple way to lower the cost of your debt when you hold multiple balances on the same credit card. First, you must understand that minimum payments are applied to the balance with the lowest APR. Only amounts paid above the minimum are applied to the balance with the highest APR. Thus, if feasible, you should pay as much as you can comfortably afford over the minimum in order to pay off your most costly debt as quickly as possible. Once this balance is paid off, you can then switch your focus to the debt with the next highest interest rate. Ultimately, knowing how payment allocation works and paying strategically will help lower your overall costs.
9. Having the wrong credit card for rebuilding credit
For many people with bad credit, the holidays represent an opportunity for a fresh start; after all, it is resolution season. If your promise for the new year is to improve your credit, you must get the right card to do so. Using a secured credit card is by far the best way to improve damaged credit or to start building new credit because it allows you to add positive information to your credit report on a monthly basis at a relatively low cost.
However, some people wish to rebuild their credit immediately but either do not have or do not wish to part with the money required for a secured credit card’s security deposit. This is ill-advised, however, because unsecured cards are by far more expensive in the long term than secured credit cards. Therefore, if you fit into the aforementioned category, use the holidays to your advantage and ask family and friends for money to put toward a secured credit card with the highest limit possible.
10. Opening the wrong rewards credit card
During the holidays, gifts are on people’s minds, both in terms of giving and receiving. Many people believe that rewards cards can help lower the cost of their shopping and even provide free holiday trips. However, this credit card category is more complicated than simply applying for any card and reaping immediate benefits.
While airline cards and hotel cards have their purposes, most people who do not travel often should merely opt for a cash back credit card. Cash is the simplest rewards option available because it can be redeemed for any purchase and cannot be devalued by credit card companies. With rewards cards that allow you to accrue points and miles, issuers can increase the number of points or miles needed for certain rewards at any time, thereby diluting the value of what you have already earned.
This article is written by Odysseas Papadimitriou, CEO of CardHub.com, an online marketplace for credit card offers and gift cards.
NOW WATCH: Ideas videos
Business Insider Emails & Alerts
Site highlights each day to your inbox.