Holiday spending is one of the most difficult things to budget for. Christmas is a time for giving, sharing, and gathering. These are some of the reasons that I love Christmas, but my budget makes it difficult to give as much as I’d like. Between big family meals, Christmas presents for all, family holiday traditions like decorating the Christmas tree, and all the other little expenses add up quickly and can leave me broke in January.
It can be tempting to open up a credit card this time of year, particularly if you’ve already been thinking about it. A well-managed line of credit can be a great boost to your credit score, and it can even help you get on top of your debt. But credit cards can be dangerous to your financial health as well, even with the best of intentions. Here is my list of pros and cons for opening a new credit card during the holiday season.
Starting with Black Friday, finding the best deals for anything related to your holiday requires the money to spend any time you find a good deal. At the end of November and through December, rock-bottom prices come hard and fast at stores all over town. The catch is that these deals end fast, and products sometimes sell out.
Opening a new credit card account before Black Friday lets you snag every great deal you want; afterwards, you can pay back the amount you owe over the course of the next couple of months. Having the flexibility to access your Christmas budget right now with a credit card means that you don’t have to puzzle over the calendar figuring out how much spending money you’ll have each week to complete your shopping.
When you open a credit card this time of year, you can replace key household items that go on sale, even though that purchase has nothing to do with Christmas. At my house, we had a vacuum that was complete junk and I was putting off replacing it. At Christmas time, I found vacuums on a Black Friday sale and saved nearly 50% on the cost of my vacuum. Having a credit card gives you the ability to do that without eating through your holiday money. However, this is dangerous! You absolutely do not want to get carried away with this tactic…
Of course, the reverse of that is true as well. A new credit card changes how you think about available money, and you can get carried away easily. It’s not as if you aren’t aware you’ll have to pay it back, but there’s something about having an empty balance credit card in your hand.
What you want to avoid is ending up with a maxed out credit card and payments that you can’t afford (duh!). Not only will you end up paying a great deal more money for those purchases in the long run, but missing payments can quickly shoot down your credit score and damage your ability to get money-saving low interest rates elsewhere.
Decide before you open a new account exactly how much you can afford to spend over Christmas and stick to it. Keep an itemized register of what charges you’ve put on your credit card and don’t use it absent-mindedly. With diligence, this negative aspect can be avoided.
It’s easy to find credit cards this time of year offering new members special introductory periods with no interest. This can be a great way to get caught up on your credit card debt if you are careful. When you have a few small credit card balances already, you can transfer those balances into the new card, where you’ll still owe the same amount of money but you’ll avoid all interest for a period of time.
Since building interest is what knocks most of us off the track of paying our credit card debt, this grace period can help you make real progress on the total amount of debt you owe. Simply keep paying the same amount that you would have to each individual account, but pay it on the new card. Meanwhile, you’ll be able to either close your old accounts or use them again for small purchases. Transferring your balances helps you approach the new year in a better financial state which is truly a gift to yourself.
It’s easy to flip that introductory period around into a negative as well. Introductory periods can lull you into a false sense of security where you feel like you’re doing better than you are. The fact is that you will still owe the money, and if you don’t pay it off quickly, then you’ll be looking at an unmanageable interest situation. It’s smart to not try to use a credit card to pay down debt unless you have a rock solid plan that you know you can commit to. Otherwise, you’ll just be gambling that you’ll be able to make enough of a dent for the balance transfer to have been justified.
A well-managed account, meaning an account that is not maxed out with on time payments, can have a great boost on your credit score. If you’ve paid off a lot of bad debt recently, then you need something to balance out the bad debt and show that you’ve fixed your financial crisis. A credit card that you are careful with sends the message that you have learned to use credit responsibly. This raises your credit score!
Now it is time for the other side of the coin. If you already have several open credit cards on your credit report, then opening another one and putting a balance on it might have adverse effects on your income-to-debt ratio. Sometimes this isn’t a problem because the right income-to-debt ratio can actually raise your credit score. The bottom line: having more debt than discretionary income is a bad sign for both your credit score and your financial health. This is something you should carefully consider before deciding to open a new credit card this season.