Will you end up taking the same risk?
- A whopping 59% of credit card users planning to incur a holiday debt think it will take them at least six months to pay it off.
- Avoiding vacation debt doesn’t mean giving up credit cards altogether.
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After a somewhat muted 2020 holiday season, many people are eagerly awaiting their best in 2021. In fact, a recent study by MassMutual found that many consumers intend to spend more on the holidays this year than they did last.
Unsurprisingly, some consumers will use credit cards to cover their purchases. And this, of course, could benefit them.
Paying holiday expenses by credit card can allow consumers to receive cash backs and other rewards that can help offset the value of those purchases. In addition, there are certain protections that consumers can enjoy when using their credit cards in stores and for other holiday expenses such as airline tickets.
Some credit card companies offer purchase protection so that if items are available at a lower price, consumers are not stuck paying a higher price. In addition, credit cards can protect consumers in situations where sellers will not accept returns for defective items or items that do not match their original descriptions.
Paying for airline tickets with a credit card can also lead to great benefits. For example, many travel reward cards offer cardholders benefits such as free baggage check-in.
But for now it does While paying for holiday purchases with credit cards, the aforementioned survey revealed one worrying trend. Of those planning to pay for holiday purchases with credit cards whose balances will be carried over, 59% believe they will not be able to pay off this debt for at least six months. And this is a mistake that can pursue them.
The Danger of Vacation Debts
Toping up your credit card balance during the holidays and keeping it for six months or longer means an automatic surcharge for purchases and expenses in interest. It’s like throwing money away.
In addition, consumers who accumulate credit card balances and do not pay them off immediately run the risk of losing their credit score. This is because credit utilization is one of the factors that are used in calculating credit ratings, and it measures how many affordable revolving loans consumers use at one time. Utilization rates above 30% will negatively affect the credit rating, making it difficult to borrow money affordable.
Consumers who plan to take out a large loan in 2022, such as a mortgage, should be especially careful not to accumulate credit card debt at the end of the year. Even a small downgrade in the credit rating can lead to an increase in the interest rate for long-term borrowing.
How to avoid vacation debts
To avoid vacation debts, you don’t just have to leave your credit cards at home and pay everything in cash. There is a lot to gain by shopping with credit cards during the holidays, and consumers shouldn’t immediately give up those benefits.
Rather, avoiding debt can be about budgeting ahead of time. Consumers need to see how much money they can spend on the holidays and promise to stick to that amount.
Accumulating a large credit card balance at the end of the year is an easy way to end the holiday season on a bad note and start the new year at a financial disadvantage. Consumers should make every effort to avoid this route, especially if they intend to increase their spending.
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