5 Tips to Control Credit-Card Use

The holiday shopping season is fast approaching, and for many consumers that means breaking out the plastic. Despite the importance of reducing debt in a recession, nearly a third of consumers plan on using their credit cards this holiday season, according to data from the National Retail Federation.

If you're planning on plastic instead of paper for your holiday shopping needs, consider these tips for keeping your credit-card use under control.

Choose rates over points: Most Americans have more than one credit card in their wallet. Your cards probably provide a variety of benefits: one for low rates, one with reward points or even one that contributes to your favorite charity. But while airline points are a nice bonus, such cards often carry higher interest rates, which add up if you carry a balance on that card. When you reach for your plastic this year, make sure you pick the one that charges the lowest rates.

Watch your limits: If you do decide to go with a single card as your consumer weapon of choice, be aware of its credit limit. Maxing out a card can have many negative consequences, beyond any embarrassment you might feel when your card is declined at the checkout counter. Not only can the credit-card company charge a nasty over-limit fee and bump up your interest rate, maxing out your card can trigger similar rate increases among other cards. And lastly, a maxed out credit card can negatively affect your credit score because the ratio of debt to available credit is a big determinant in calculating your score. One rule of thumb: Keep your balance at 30% of the available credit to avoid any slide in your credit score.

Understand the costs: Unless you pay your balance in full each month, you'll end up paying more than the sticker price for your gifts this year. The longer it takes to pay down your balance, the more you end up paying overall for that sweater, toy or vacation. To get a sense of how much more, check out the online Credit Card Calculator at BankingMyWay.com. For example, if you make the 2% minimum payment on a balance of $832 (the average amount consumers plan on spending this holiday, according to the NRF) on a card with an annual interest rate of 15%, you'll end up paying a total of $1,674.

Track your spending: To avoid buyer's remorse when you open your credit card bill in January, consider keeping track of how much you've spent, as you spend it. It's easy to lose track of what you've bought when all you have to do is swipe a card at checkout. Consider making a holiday budget and crossing off items as you buy them. Alternatively, write down everything that you bought at the end of the day and keep a running tab of how much you've spent. That way you can make changes in your shopping plans if you find yourself spending more than you can afford.

Plan ahead: For next year, consider switching from credit to cash for your holiday shopping. Plan ahead and put away a few dollars every paycheck throughout the year to make sure you have enough to cover your holiday expenses. Best of all, the pay-as-you-go approach doesn't require the same care as does shopping with credit because it's difficult to dig too deep a financial hole when your spending is limited by the cash in your wallet. And, besides, the feel of forking over a pile of Andrew Jacksons will help control spending a lot better than swiping and signing on the dotted line.

Peter McDougall is a freelance writer who lives in Freeport, Maine, with his wife and their dog.

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