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A Guide To Using Credit Cards at Christmas

Last updated

Pauline Hatch      

With some of the most competitive credit card offers released towards the end of the year, it is tempting to pay for all the holiday season expenses with a card. But these introductory offers have the potential to lead to a lot more debt.

Paying with plastic at Christmas is an ongoing trend in Australia, with past research from organisations such as Liberty Financial and Veda revealing both credit card applications and spending increase significantly in the months leading up to December holidays. Worse still, many people do not increase repayments and end up dealing with holiday season debt for 12 months or more.

One thing you don’t want is for the Christmas spirit to haunt you for the next year. The danger is that missing credit card payments can negatively impact your credit history, and lead to all kinds of other issues down the track.

The dilemma for consumers is that there is potential to save a lot of money in the lead up to Christmas by taking advantage of credit card introductory rates, particularly when so many charge 0% interest for the honeymoon period. It’s just that making sure these deals work for you is where the problems arise because it is so easy to leave full repayments til the last minute – and if that means rates revert and you get charged interest, the risk of debt and defaults is even worse.

The same goes for using a credit card you already have – even if you can take advantage of features like interest free days, more charges mean higher repayments at a time of year when financial management is usually the last thing we want to think about.

So how do you balance out the risks and the benefits of paying with credit at Christmas? One of the easiest ways is to plan ahead now for expenses and repayment strategies. With that in mind, we’ve developed this guide to help you get the most out of credit cards and avoid more debt during the holiday season in just a few simple steps.

On This Page

  1. Do you need a new credit card now?
  2. Choose a credit card to use (and stick to it)
  3. Create a Christmas budget
  4. Plan for repayments
  5. Shop around for the best Christmas deals
  6. Conclusion

Do you need a new credit card now?

Despite the extremely low interest rates and long honeymoon periods that are now typical of credit card offers at this time of year, not everyone needs a new card.

While the goal could be to get interest free credit for all the extra expenses that the end of the year brings, applying for a credit card just to take advantage of a balance transfer deal or introductory purchase rate that’s lower than the norm actually works against a lot of people in the long run. If you don’t pay the balance off by the end of the introductory period, for example, you could end up with an interest rate jump of up to 21%.

What’s more, if you only opt for a partial balance transfer, or continue to use a credit card you already have, you will end up juggling two or more credit card balances, which is often a recipe for debt.

So before applying for any of the competitive deals advertised, it’s a good idea to consider whether or not you need a new credit card right now. Are there issues with your current credit card? Would you cancel your existing card? Or are you just trying to take advantage of one of the offers available?

The other thing to remember is that often these introductory offers last a few weeks or months into the new year. When that’s the case, holding off on applying gives you a chance to put your purchases on a current card and then transfer the entire balance to a 0% offer when all the purchases have been made.

The fine print for credit card offers outlines how long these deals are available, so checking that before you apply can help you make sure the timing really works for you.

Choose a credit card to use (and stick to it)

If you have more than one credit card, it could be tempting to switch between them when you are putting a lot of purchases on plastic. But sticking to just one account will help you keep track of how much you’re spending at this time of year.

Being aware of the balance of just one card also makes it easier to stick to a Christmas budget and helps you plan for repayments. And let’s face it: making one credit card repayment a month is much better than dealing with two or more.

On the other hand, credit card features vary between accounts and there could be some options that you want to take advantage of at this time of year. If you know you’ll be spending a lot, for example, it’s tempting to consider how that would boost points for a rewards card. Similarly, shopping with a card that has complimentary purchase protection or a best price guarantee is a great way to safeguard everything you buy.

Whether these features are spread across your cards or mainly on one card, it’s a good idea to pick just one so that it’s easier to manage your credit card balance over the holiday period. Reading through the features and comparing complimentary extras as well as the interest rates, means you can get the most out of your credit in a manageable way.

Create a Christmas budget

Budgeting for the festive season is a great step to take regardless of whether or not you are planning to use a credit card. For starters, it gives you an idea of how much you will spend compared to how much you earn so that you can figure out the best way to pay for things.

But a Christmas budget also means you have a plan for not only how much you want to spend, but what you will spend it on. With swarms of people racing through supermarkets and shopping centres at this time of year, knowing exactly what you need to get could save you a lot of time and stress, as well as a lot of money.

Another great thing about doing a seasonal budget is that it can help you cut down on non-essentials – seeing everything written down helps you figure out exactly what you need and what you might not need. To simplify the budget process, we’ve developed a handy Creditcard.com.au Christmas cost calculator Excel sheet that you can download and fill out with as much or as little detail as you like. There’s even a tab to calculate credit card interest on the purchases that you make with plastic.

Westpac partner and financial planner David Simon also recommends considering any additional costs that could arise at this time of year.

“When preparing your budget and Christmas savings plan ensure you take into account all of your expenses including any spending leaks,” he says in an article about Christmas spending on the Westpac Davidson Institute website.

These are the “small regular expenses that don’t seem to cost much at the time of purchase but when added up could make a significant impact on your yearly budget”, such as bottled water or coffee. While these purchases seem small at the time, over a week, month or year, they add up to a significant amount of money.

“We often don’t realise how quickly these seemingly small expenses can add up,” Simon says.

So if you are planning to go shopping for Christmas as a family, it could be a good idea to budget for food and drink, or plan ahead and take snacks with you.

Plan for repayments

Planning for repayments is a great way to manage your credit card throughout the year. But at a time when spending is often increased, this process is even more important.

As David Simon says in the Davidson Institute article, recent research has revealed that around 70% of us use credit for Christmas expenses and almost a third struggle to pay it all back in the months that follow.

“Worse still, 7 percent indicated that they had still not paid off their Christmas debt up to 12 months later,” Simon says. He recommends making additional payments at this time of year to reduce the size of the balance bit-by-bit, rather than dealing with just when payment is due.

“Making extra payments in the lead up to Christmas may allow you to be that little bit extra ahead than you would normally be in December and January,” he says.

If you don’t want to think about repayments more than usual, setting up automatic payments is a convenient way to deal with your credit card bill at this time of year. Usually you can choose to set payments for the minimum amount, the full amount or a dollar value of your choosing, which should help keep your balance manageable and your repayments on time.

Shop around for the best Christmas credit card deals

Credit card issuers amp up their offers and their advertising at this time of year, but it is still a good idea to compare different options before you decide to apply for a new credit card. The most important things to keep in mind are:

  • The terms and conditions for the introductory offer,
  • The length of the introductory period,
  • The regular interest rates for purchases and balance transfers,
  • The cost of any annual fees,
  • Whether or not you will get interest free days for purchases.

Deciding how you plan to use the card can also help simplify the search for a good credit card. While some introductory deals cover both purchases and balance transfers, others could only offer one or the other. Knowing exactly what you want the card for will help you find the best offers and keep your goals on track too.

While we’re on the topic of comparisons, the same approach can help you get the best price on the things you actually want to buy. A lot of stores have competitive offers and promotions at this time of year, and many have the same products at different prices. So shopping around in person or comparing prices online will help you get the biggest bang for your buck.

Conclusion

The holiday season often leads to more shopping and bigger credit card balances, but it doesn’t have to end with bigger debts. Being aware of the expenses and planning for them means you will be better equipped to deal with any additional costs that come at this time of year.

Similarly, taking time to think about how you will pay for things and choosing the right credit card could help you get everything you need without spending extra money in the process.

Christmas should be a fun and fulfilling time for you, your friends and your family. The sections of this guide are designed to help you manage your money so that you can spend less time worrying about your credit card balance and more time celebrating.

Photo source: Shutterstock
Pauline

Pauline Hatch

Pauline is a personal finance expert at CreditCard.com.au, with 8 years in money, budgeting and property reporting under her belt. Pauline is passionate about seeing Aussies win by making their money – and their credit cards – work smarter, harder and bigger.

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