But, while we may be enjoying ourselves now, chances are our credit card bill may not bring quite so much cheer come January. Bah humbug. Okay, so it’s not very festive to admit, but Christmas is expensive. And, even if we’re sensible with money throughout the 11 other months of the year, there’s something about Christmas that makes us say, screw it, just spend.
According to research carried out recently in the United States, 45% of cardholders surveyed said they were willing to take on credit card debt this holiday season (1). Not that surprising? Flexing plastic over Christmas is hardly uncommon. However, what is worrying is the fact that 41% of those cardholders already had credit card debt, with 56% admitting to being in debt for at least a year, and 37% for two years or more.
Going into Christmas 2019 stacking more debt on top of existing debts from Christmas 2018 and 2017? Santa surely wouldn’t approve of that.
Just think about the interest on that debt for a minute. Paying up to 22% or 23% p.a. in interest on purchases made on Christmas gifts two years ago is more than silly. But, it can be what you are left with if you overspend on your credit card and then you cannot – or will not – pay it all back.
What’s the solution? Learning how to be smart with your credit card is a good place to start. Not only will this help stop you overspending during the silly season, it can also help you avoid paying back too much in interest and getting in over your head in debt. You may even get yourself on the ‘nice’ list again.
Common Credit Card Mistakes at Christmas
While there’s nothing wrong with having some festive fun, it’s always worth remembering that there is real life to deal with after the decorations come down. If we want to avoid getting into financial strife with our credit cards, we need to learn from our mistakes. So, with that in mind, let’s look at some of the most common mistakes you could make with your card this Christmas.
Overspending & Sticking Your Head in the Sand
At Christmas, there always seems to be some reason to spend. Cocktails after work. Celebratory lunches with friends. A new outfit for this party or that event. Not to mention the big shop for Christmas lunch, all the gifts for family and friends, and the trip away over New Year to recover from the excesses of Christmas.
Unless you have been diligent with your saving, it’s likely much of this spending will end up on your credit card – often with the thought that you will ‘deal with it in January’. But what happens then? You will have a pile of debt to deal with, accumulating interest day by day as you figure out how to deal with all that overspending you made excuses for throughout December.
Piling On More Debt
When you already have debt on your credit card, it can be oh so easy to add to it. After all, you already have a balance that you’re paying interest on, adding to it can’t make that much of a difference, can it?
Yep, it can. If you’re thinking about adding to your credit card debt this Christmas, first take a step back to do some sums on a credit card calculator. First, work out how much you are likely to pay in interest on your current balance before you pay it back. Then, add your expected balance and see how much longer it will now take to pay it all off – and how much more you’ll pay in interest.
On top of that, you should consider your credit utilisation ratio. What’s that, you ask? Say you have a credit limit of $1,000. If you have a balance of $300, your credit utilisation ratio is 30%. If you have a balance of $950, your credit utilisation ratio is 95%. Having a high credit utilisation ratio not only affects your credit score, it can also affect your chances of being approved for credit.
Indulging in Buy Now Pay Later
While you may think we’re straying off topic here, buy now pay later (BNPL) can get you into trouble at Christmas in just the same way as a credit card. And with more and more Aussies using BNPL – around 30% of Aussie adults now have one or more BNPL accounts (2) – it’s worth touching on the problems associated with using BNPL at Christmas, here in this article.
As the name suggests, BNPL offers a service that allows users to buy now and pay later, spreading the cost of their purchases over four equal payments. Typically, the first payment is made at the time of purchase, and the remaining payments are made at the end of each fortnight following that.
Using most BNPL services, there is no interest to pay, but users may pay a fee if they miss a payment. However, what you might not know is that if you use BNPL and continue to miss payments, your BNPL service may report you to the credit reporting agencies. So, while you may not need a credit check to use BNPL, your credit rating could be negatively affected if you misuse it.
And that’s not the only danger you could face when using BNPL. According to a recent report (3), 60% of BNPL users surveyed said they bought things they otherwise wouldn’t have if there hadn’t been the option to pay in installments. Not only that, the report found that 28% of survey respondents ended up in financial strife thanks to their use of BNPL.
One problem some users seem to have revolves around keeping track of payments. With 25% of users having 3-5 payments on the go at any time, it’s easy to see how you could lose track – especially at Christmas, when you are likely to be buying more. The report showed that 33% of users said they’d missed at least one repayment, while 14% had missed multiple repayments.
Forgetting Bills or Repayments
Of course, it’s not just BNPL users who miss repayments. Forgetting about bills and repayments is all too common at Christmas, when everyday life gets switched up for something so much more exciting.
Missing a payment isn’t the end of the world. It happens. You may need to pay a late fee, and you’re likely to feel a bit silly. But, letting it go further than that could have more serious consequences. If you let a payment slip for more than six weeks, it becomes a default, which will be recorded on your credit file for up to five years. This can make it more difficult to get approved for credit when you apply later on down the line.
Getting On The ‘Nice’ List
Now we’ve covered what not to do with your credit cards this Christmas, it’s time to look at what you should do if you want to make them work for you. At this point, it important to recognise that credit cards are not automatic debt machines set on getting you into trouble. They are simply tools you can use, which require some self-control and a bit of know-how.
So, what do you need to do to get the most out of your credit card as you go about your festive spending this Christmas? Let’s take a look.
Start By Clearing Your Debt
We’ve already talked about how piling more spending on top of debt you are yet to pay off is not a great idea. If you already have credit card debt, this is the time to do something about it.
- Tighten your spending: Look at your spending habits to see where you could cut back. If you are really serious about paying down your debt, you may want to make Christmas a small one this year, to help you get back on track for next year.
- Pay off what debts you can: If you have credit card debt accumulating interest at a rate of 20% p.a., and savings earning 3% p.a., consider whether you may be better off paying down some of that debt (while leaving sufficient savings should you need them).
- Take on some extra work: Check out the range of Christmas jobs in your area and take on some extra work to pay down your debt.
- Sell things you don’t need: Time to clear out the garage! If you have stuff you don’t need, but think others might pay for, sell it all and put the proceeds towards your debt.
- Consider a balance transfer offer: While a balance transfer offer is not the solution for everyone, it could work for you if you have a plan and are disciplined. Find out how much you need to pay off each month to clear your debt within the intro period, control your spending, and close your old card to avoid racking up more debt.
Make Time To Make A List
Just like Santa, you need to make a list. In other words, you need to create a budget. Start by noting down all your incomings. This is usually the easy bit. Now, record all your outgoings. Most people generally underestimate how much they spend, so it can be a good idea to use an app to track your spending.
Once you’ve got that in order, you can work on creating a budget that gives priority to paying bills and debts, to then allow you to turn your attention to savings and lifestyle spending. This should help you work out how much you can afford to spend this Christmas, while putting you on a better path financially to cope with next Christmas when it rolls around.
After paying down your debt and creating a workable budget, it’s time to get strategic with your credit card. Does your current credit card work for you? Are there other cards or offers out there that could give you more? Think about how much you are currently paying in fees and interest, as well as what you’re getting in return. If your credit card doesn’t satisfy your needs, it could be time to switch it up for a newer model.
Make the Most of Intro Offers
One of the best things about Christmas has to be the gifts. Happily, you can give yourself a gift by choosing a card with a great introductory offer. Obviously, you have to look beyond the offer to make sure the card actually works for you, but after that, simply sit back and enjoy your gift.
0% Purchase Offers: With this type of offer, you will pay no interest on purchases over the introductory period. This can offer an awesome way to cover your Christmas spending, as it allows you to buy what you want now, to then pay it all back before it starts accruing interest.
To make it work for you, decide how much you can afford to spend, and how much you will need to pay back each month to clear your purchases before they start accumulating interest.
Bonus Points Offers: This type of offer provides a chunk of bonus rewards points to new cardholders, usually after meeting a minimum spend. Depending on the offer, those bonus points could take you away on a sweet Christmas getaway, or give you a gift card to cover some of your Christmas spending.
To make it work for you, make sure the minimum spend is achievable, and pay it all back before it attracts interest. Also ensure you get the highest return on your points (which usually means using them for travel).
No Annual Fee Offers: This type of offer reduces or waives the annual fee for the first year, helping you to save money, while getting more value from your card.
To make it work for you, make sure you can afford the standard annual fee, or cancel the card before the standard annual fee comes into play.
Balance Transfer Offers: This type of offer allows you to transfer the balance from an existing card to benefit from a much lower rate of interest over an introductory period. While you could take advantage of this type of offer to clear your debt before Christmas, it’s important not to run up more debt on your old card once its balance has been cleared.
To make it work for you, transfer your balance onto a worthy balance transfer card, close the old account, and make every effort to pay down the debt before it starts accruing interest. Check for balance transfer fees and what the intro rate will revert to.
Choose the Right Card
Whether you choose a card with an introductory offer or not, you need to think about how suitable the card will be day-to-day. If you plan on keeping the card in the long term, that means considering how well it will suit not just your Christmas spending, but your everyday spending as well.
When comparing credit cards, take into account the following factors:
- How much will you pay in annual fees? If you only want a basic card, you should pay minimal annual fees. However, if you want a rewards card or a card packed with features, you should expect to pay more in annual fees. Weigh up whether the value of what you are getting is more or less than you are paying in annual fees to calculate its worth.
- How much will you pay in interest? If you tend to carry a balance month-to-month, choosing a card with a low rate should help you save on interest, allowing you to keep a better handle on your debt. If you always clear your balance, a card’s interest rate shouldn’t hold much importance.
- What does it offer in extras? If you want a no frills card, that’s what you should go for. On the other hand, if you want features and extras, you will need to compare your options. Some extras that can come in handy at Christmas include extended warranty, purchase protection and price protection. If you plan on travelling over the festive period, look out for extras such as travel credit and lounge access. Certain Citi cards offer a free bottle of wine when dining within the Citibank Dining Program, which could add some festive cheer to your holiday period.
Having had a quick look at extras, let’s turn our attention to rewards. As long as you know how to make it work for you, the right rewards cards could offer some serious returns over the festive period. Here are some ways you can use rewards to get something back on your Christmas spending over the next few months.
- Using your current rewards card: If your current rewards card is still working well for you, make sure you use it to its full potential to earn the maximum number of points over the Christmas period. That may mean logging on to your rewards account to uncover the latest deals, such as bonus points offers you can take advantage of by shopping at partner retailers.
- Redeem your points: Check your points total and find out what you could get for it. It’s important to use your points wisely if you want to get the highest value on your redemption. You will usually find travel, such as flights, offers the highest value return, followed by gift cards, while merchandise typically offers the lowest return. Time for a Christmas getaway?
Think About What You’re Getting
Coles’ latest Christmas flybuys promotion lets customers earn ‘glassware credits’ that can be redeemed for a pair of Spiegelau glasses.
For each $20 spend, customers receive one glassware credit, and with 25 glassware credits – equivalent to a minimum spend of $500 – they receive a box of two Spiegelau glasses.
Considering the fact that a pack of four Spiegelau glasses typically retails for about $80, customers are spending $500 for a product valued at $40.
While this is an example of flybuys rewards, it provides a fitting example of the value typically on offer to rewards cardholders who redeem their points for merchandise.
Before redeeming your hard-earned points, think about how much value you are actually getting on your chosen reward.
- Utilise supermarket rewards: Whether you go for the full Christmas roast or a laid back barbeque, if there’s one thing Christmas is known for it’s full bellies and expanding waistlines. To get something back on all those big grocery bills over the Christmas period, consider applying for a supermarket credit card that boosts your loyalty points earning.
- Apply for a new card: Time to apply for a new rewards card? Whether you are just stepping into the world of rewards, or your current rewards card just isn’t that rewarding, this could be the time to apply for a rewards card that works for you. When applying, think about:
- Bonus Points: An introductory bonus points offer can offer serious bang for your buck. Consider how to get the most value from those points, and make sure the card suits you in the long term if you plan to keep it.
- Rewards Earning: Choose a card that offers the highest points earn on the spending you do most often. Check for any points caps that may limit your earn, and make sure the rewards program offers rewards you actually want to use.
- Cashback Rewards: While cashback rewards are bigger over in the US, you can find a few good options here in Australia as well. Check for earn limits set per month, or per year.
- Annual Fees: A rewards card is only rewarding if you get more back in rewards value than you pay out in annual fees. Calculate how much your card will give you in rewards value before you apply. Also, just forget about rewards cards if you ever carry a balance. The interest you pay will likely negate any rewards value you earn.
Take Advantage Of Technology
If you’re still struggling to keep your credit card in check, it’s time to call in some backup. When it comes to budgeting, tracking, and generally staying on top of your credit card, technology can offer a helping hand. You just need to know how to use it. Here are some ways you can use technology to help you make Santa’s ‘nice’ list this year – and every year after.
See what your app could do for you: Banking and credit card apps are getting smarter. While some offer more than others, it’s worth taking time out to see what your app could do for you. For example, the CommBank app offers some great functionality. With it, you can:
- Lock, block and limit your credit card. This could be especially handy if you are prone to overspending, as you can limit the amount you allow yourself to spend.
- Change your credit limit or daily limit. Again, this could help you limit the amount of damage you do if you tend to overspend.
- Track your spending. With Spend Tracker, your debit and credit card spending will be categorised, making it easier for you to see where your money is going, allowing you to make better decisions in the future.
- Get an overview of your finances. With Cash Flow View, you can get a better view of your income, spending and saving habits across all your CommBank accounts. You can then get a more complete picture of how you’re trending month-to-month.
Use a budgeting app: If your banking or credit card app doesn’t offer budgeting functionality, consider using another app to do the work for you. Creating a budget manually can be hard work, and it can be easy to miss outgoings when life gets busy. Do some research online to find the budgeting app that will work best for you, and make sure it is secure before you start using it.
Set reminders: Need some help remembering what bills need to be paid and when? Use your phone as your PA, and set reminders to tell you when bills are due. Alternatively, you could set up automatic payments, which means all you have to do is make sure there are sufficient funds in your account to cover them.
Compare and save: You can find the cheapest way to do pretty much anything online. Whether that means finding the cheapest rate on petrol in your local area, the lowest price on your next big ticket purchase for the house, or the most fuel efficient way to get from A to B, you can find the best ways to save with a little research and your trusty smartphone. Not only will paying less help keep your credit card in check, you can use your savings to pay down your balance.
Start That Christmas Countdown!
Ready for that Christmas countdown to begin? Well, some would say it’s already ticking away. Coles had their mince pies and Christmas puddings out in August this year, and the decorations have been up in Westfield for months. No matter though, you are now ready to take on Christmas with your extensive credit card know-how.
Take note Santa, your ‘naughty’ list is about to get much, much shorter.