Using credit to tackle your holiday shopping can be tempting. And offers of a discount for opening a new account, or interest-free purchases for a year or more make it more enticing.
But relying on credit without a plan to pay off the debt quickly can easily cost you more in the long run. Carrying higher balances for several months could lower your credit score, making it more expensive to refinance your home, buy a car or qualify for other loans.
Here are three tips that can help you avoid ending up with a debt hangover this holiday season:
Read the fine print
This time of year, credit issuers and retailers roll out cards with special discounts and interest rate grace periods in a bid to woo borrowers. If you can't resist applying, be sure to read the fine print that spells out the limits on these perks, as well as circumstances that could trigger higher charges or annual fees.
There are cards, for example, that offer 0 percent interest on purchases for a year or more. They can save you money over time. But often just being late on a single payment is enough to end the interest rate grace period, wiping out your initial savings.
"Often, if the balance is not completely paid off prior to the expiration date of the time period, a high interest rate is charged going back to day one," said Ray Benton, a certified financial planner based in Denver.
If you're considering using a card offering zero interest on purchases for a period of time, try this: Take how much you would charge on the card and divide it into monthly payments within the interest-free period.
This can help you determine whether you can comfortably afford to pay the balance off before the regular interest rate kicks in. If that payment schedule is too much of a financial squeeze, it's likely you'll end up paying interest charges.
Cash in rewards
If you've been accruing rewards points on one of your credit cards, you may have already earned enough to buy gifts this holiday season.
Some cards offer cash back, credits against your balance or even special deals to buy gift items from a points redemption store. Major card issuers such as American Express, Chase, Citi and Discover offer some type of points reward program.
Have a repayment strategy
Establish a budget for how much of your holiday shopping you can put on your credit cards and still afford to pay off any balance within a realistic, but expedient, period of time.
That should also help limit your spending and provide a roadmap for paying off your card balances.
Hardekopf also says if you are going to carry a balance, contact your issuer and ask for a lower rate. There is no guarantee that it will be lowered, but it never hurts to ask.
And there's no reason to wait until your payment is due. Making small payments twice a month or more can help blunt interest charges. That's because most card issuers charge based on your average daily balance.
"You can save quite a bit of money by making micro payments," said Hardekopf.
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