By Laurie Itkin
The holidays are here and that means it is time to shop for gifts!
I often help single mothers develop budgets after divorce. Although the women remember to include in their monthly budget entries for rent, utilities, child care, and manicures, they may forget to include an entry for gifts because these expenditures don’t occur evenly throughout the year. So when December rolls around and they haven’t saved any money to purchase holiday gifts, they have to rely on credit cards.
Think Before Signing Up for a Retail Store Credit Card
Employees behind the counter are ready to pounce on holiday shoppers. They may entice you to open up a store credit card by offering you a discount on the items you purchase that day if you apply for and use the new card.
If you are spending $500 on gifts (and maybe something for yourself), an offer of 15% off results in a $75 savings. That sounds good, doesn’t it? It is only a good deal if you are confident you can pay off the balance on your credit card within a few months. That is because store credit cards typically carry much higher interest rates than the average credit card.
Let’s say you want to make a $500 purchase at a particular store. The cashier suggests you open up a store credit card in order to get 15% off your purchase. You get a $75 savings and therefore put only $425 on the credit card. If the card charges 25% a year in interest and you can only afford to make the minimum payment of $25 per month, it will take you nearly two years to pay off the card and you will have also paid about $105 in interest, which is $30 more than what you initially saved!
Another thing to consider is the impact on your credit score of applying for multiple credit cards. Any time you apply for a new credit product, such as a store credit card, the issuer will perform a “hard” inquiry on your credit report. Multiple hard inquiries can have a negative impact on your credit score. Your credit score matters tremendously as it affects your ability to get loans, obtain affordable car insurance rates, rent an apartment, or buy a home.
Even One Late Payment Can Hurt Your Credit Score
When you are juggling multiple credit cards, it is easy to forget when each bill is due. Being 30 days late and missing a single payment on a credit card can drop your credit score by 50 to 100 points, enough to push your credit score down from “good” to “fair” or “fair” to “poor.” Most credit card issuers offer ways to set up email and text alerts. You can set alerts to notify you when your payments are due or when you’ve reached a certain spending threshold.
You don’t have to succumb to the idea you need to break the bank by spending money you don’t have.
Don’t Max Out Your Cards
Your credit utilization ratio also impacts your credit score. This ratio represents how much of your available credit you’re using at any given time. Carrying high balances on your credit cards can hurt your credit score if you are using more than 30% of your limit.
Get Discounts without Signing Up For New Credit Cards
Instead of signing up for new credit cards, there are websites and apps that allow you to get cash back on purchases at a variety of stores using your regular credit card. Whenever I sit down to do my online shopping trip I start at Ebates. I routinely get from 5% to 10% back on purchases I make year-round. You can also get the cash-back offers at many retail store locations. This way I keep the purchases isolated to my lowest-interest credit card and don’t have to remember to pay more than one bill each month.
During the holidays, some women feel pressure to buy lots of gifts. However, you don’t have to succumb to the idea you need to break the bank by spending money you don’t have. There are plenty of ways to enjoy the holidays with friends or family without running up credit card debt.
About the Author
Laurie Itkin is a financial advisor, certified divorce financial analyst (CDFA), and the author of the Amazon bestseller, Every Woman Should Know Her Options. For less than the cost of a one-hour meeting with an attorney, her online course, Woman’s Guide to Financial Independence After Divorce, teaches separated and divorced women essential financial concepts. You can request a free consultation or subscribe to Laurie’s newsletter by visiting TheOptionsLady.com.