Before you pull out the plastic this holiday shopping season, think carefully about how long it will take you to pay off your credit card bill, and what kind of impact it could have on your finances. Above, customers shop at a Kroger Co. supermarket last year in Cincinnati. (Al Behrman / AP)
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'Tis the season when our hearts are warmed by that giving spirit, and we madly search for the perfect gift for second-cousin Clara.
But before you pull out the plastic, think carefully about how long it will take you to pay off your credit card bill, and what kind of impact it could have on your finances.
In fact, here's a new idea: Before you even set off on a shopping trip, be it online or to a department store, get the cold, hard facts about your finances.
Knowing your credit score is important because that's what lenders use to help them decide not only whether you qualify for a mortgage, credit card or some other form of credit, but also the interest rate you'll pay for that credit. Your credit score draws information from the reports of the three national credit reporting bureaus.
This is also a good time for you to check those reports for any inaccuracies and take steps to correct them, says Gerri Walsh, president of FINRA's Investor Education Foundation.
By law, you can receive a free credit report every 12 months from each of the credit reporting bureaus — TransUnion, Experian and Equifax. Get them all at once, or space them out during the year.
Your credit reports also will give you information on how to improve your score — for example, letting you know that a high balance on a credit card has pulled down your score. This information should make you consider carefully whether you want to rack up an even higher balance on your credit cards and lower your credit score further.
And it's not just about the scores — carrying a balance costs you money. As of Nov. 21, the average annual percentage rate on variable-rate credit cards was 14.58 percent, according to http://www.bankrate.com">Bankrate.com. That means if you started out the year with $1,000 in credit card debt at that interest rate, you would pay $145.80 in interest charges over a year's time.
If your credit score has opened your eyes to some issues, try to get a handle on your monthly bills and expenses. Resources at FINRA's http://www.SaveandInvest.org">SaveandInvest.org can help you track your spending.
Credit cards aren't the only thing to keep an eye on. Walsh reminds shoppers to be careful about overdrawing checking accounts, whether you're writing checks, using your debit card or making online transactions.
Avoid this by keeping careful tabs on your checking account balance, including balancing your checkbook regularly. Consider opting out of overdraft protection programs that automatically approve ATM and debit card transactions even if there's not enough money in your account to cover them.
The average overdraft fee is $34, according to the Center for Responsible Lending.
Walsh advises thinking through your shopping before you click or get into the car. Decide how much you are able to spend, make a spending plan and a list, and stick to them.
Remember that a meaningful gift doesn't have to cost a lot of money. Think about why you want to give that person a gift. It's because you care about them, and hopefully that feeling is reciprocated.
So following that logic, here's my advice: The people who really care about you would not want you to go into debt, or deeper into debt, to buy them a gift.
If you're in a hole, the smart thing to do is stop digging — and then start climbing out.