4 Easy Ways To Avoid Holiday Credit Card Debt
Businesses usually depend on the holiday season to top off their annual sales and profits. They stock up, price up and hope to smile all the way to the bank. They know that people will be less frugal in their spending than at other times of the year. You may be among those who have suffered financial woes after the holiday season. If so, you want to make sure it does not happen again. Your success depends on how well you control three crucial factors:
- Your rate of spending
- How you finance that spending
- The heavy financial burden that can follow
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With the holidays coming around so quickly, people might find they have not saved enough for their needs. Anymore, budgeting has become an alien concept to most people and spending tends to spiral out of control. Since most people don’t save and don’t have enough cash on hand, they will resort to credit cards to cover the shortfall. There are some advantages to using the card to finance your expenditure if you use them wisely:
i) It gives you free access to about a month’s credit.
ii) It gives you the temporary ability to spend beyond your current means.
iii) It allows you to track your expenditure.
iv) You do not have to carry lots of cash around with you.
On the other hand, using credit cards carry significant dangers if their use is not prudently managed. Research shows that spending can increase as much as 35% when using a credit card in lieu of cash. Use these easy tips to save you from running into trouble with credit card debt.
1. Plan Your Spending
Forewarned is forearmed. You should draw up your spending plan well in advance. If your spending is going to exceed your income for the holidays or any time of the year, consider trimming and containing yuletide expenditures to stay within your limits. That’s where a credit card comes to the rescue. It might not be obvious, but your credit card usage can upset the management of your finances. Unless you are watching your spending in both cash and credit closely, there is a danger that you will be lose track of whether or not you are living within your means. It is unwise to begin using your credit card if you do not have a spending plan to adhere to. With a spending plan in place, you can remain in control of your finances.
2. Debt to Income Ratio
Be aware that use of a credit card adds to your indebtedness. When managing your finances, one of the important flags to keep an eye on is your debt-to-income ratio. The debt-to-income ratio is the monthly debt repayment as a percentage of your monthly after-tax income. It raises a red flag when you incur too much debt. A ratio that is over 20% is skirting danger. If you already have credit card debt that is overdue, be sure not add to it.
3. Bridging Finance
Use of a credit card is ideally a means of short-term financing of your needs. That means settling any debt incurred using your card within a matter of days. Paying the minimum balance will not suffice. If you are not confident that you can pay it off entirely, you can do yourself a huge favor by not using a credit card. If you decide to use your credit card anyway, you will incur the extra costs in interest and penalties associated with extended credit. This adds to your expenses in a compounding fashion. You must be ready to reduce other expenses to overcome these additional costs. Otherwise, you run the risk of creating inescapable recurring debt.
4. Net Worth
Credit card debt incurred during the holiday season is usually for consumer spending. Paying for your festivities, buying gifts and travel expenses creates consumer debt. This kind of debt adds to your liabilities, but contributes nothing to your assets. Your net worth is reduced by the amount of consumer debt incurred. Shrinking your net worth is bad for your financial health.
Have yourself a merry little Christmas, but be smart and finance it in a way that gives you the comfort that you won’t be buried in debt in the following months.