Yahoo Finance Prepare Your Credit Cards for Holiday Shopping
It doesn't seem like it can be that time of year already but -- believe it or not -- consumers around the globe will soon be breaking out their credit cards and getting started on holiday shopping lists.
There are many reasons to favor your credit cards over cash when it comes to holiday shopping. But in order to get the most out your purchases, you should also make sure your credit cards are in the best shape possible. After all, they are about to get a serious holiday workout. Here are a few steps to take to make sure your credit cards are fit for holiday shopping.
Create a budget. Although it's important to have a shopping list ready and a general idea of how much you'll spend, you should also create a holiday budget to make sure your spending doesn't get out of hand. It's easy to just charge everything without paying attention during the holidays. But after the holidays have passed, you'll realize that you have spent hundreds of dollars more than you intended -- or can actually afford. Nobody wants to go into the new year carrying a lot of debt.
[See: 8 Financial Steps to Take After Paying Off a Debt.]
Before the holidays are in full swing, figure out exactly how much you can spend on your credit cards and how long it will take to pay off those purchases. Remember that each month you have to carry over your credit card balances means more interest, which can devalue any rewards or benefits you earned using your credit cards in the first place.
Check your credit score. Before beginning your holiday shopping spree, it's a good idea to check your credit score. Will using your credit cards cause your credit score to drop significantly? Take a look at your finances and credit cards and compare the amount you plan to spend to the amount of time it will take you to pay down those charges. If your purchases will max out your credit cards or increase your utilization ratio, a measure of how much of your available credit you've already used, you might want to work on paying off some of your debt obligations and paying down the balances you have to avoid a bigger hit to your credit. The amount of money you owe -- which affects your credit utilization ratio -- is the second most important factor in your credit score, according to credit score provider FICO.
[See: 10 Easy Ways to Pay Off Debt.]
Check credit limits. Make sure that you have a clear understanding of the credit limits on each of the credit cards you plan to use for your holiday shopping. This will not only help you avoid the embarrassment of going over the limit, but will prevent you from unintentionally maxing out your credit cards. If you plan on carrying your balances for a few months after the holidays, it will be more cost-efficient if the balances are low and manageable. Ideally, it's best to pay your balances in full to avoid paying interest on your gift-giving.
Examine your rewards program. One of the most valuable perks of using your credit cards for holiday spending is the opportunity to rack up extra cash back, miles or other rewards that the card issuer offers. However, because of some quirks in many reward programs, the cards you carry and use may not be earning you all the rewards you are entitled to.
[See: 8 Ways to Maximize Your Credit Card Rewards.]
For example, if the majority of your holiday spending falls into categories, such as electronics or department stores, you should check to see which cards offer the most rewards for those types of purchases. Do you plan on taking a big family vacation for the holidays? Make sure you use a credit card that rewards you for your travel purchases. With new cardholder sign-up bonuses and different rewards programs, you could earn much more with a new card than with one you already have.
By sticking to a budget, knowing your limits and deploying rewards programs judiciously, your credit cards and credit score may come through the holidays unscathed. In fact, they may be even fitter than ever.
Greg Go is the co-founder of Wise Bread, an award-winning personal finance and credit card education blog, where you can find tips on how to find the best travel credit cards.
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