4 Tips to Avoid Credit Card Debt During the Holiday Seasons

Thebestindonesia.com – Business people usually cash in on the holiday season to maximize their sales and profits. It will be high season for them. They will stock up, price up, and smile at the bank. They know that people will be less restrained in suspending than at any other time. You may be among the many who have suffered post-holiday season financial stress and want to ensure it does not happen again. Your control of three critical factors will determine your success: your increased spending rate, how you finance that spending, and the heavy financial demands that follow in the subsequent month.

With holidays like Christmas or the New Year seeming to come around too quickly, people often find they need to save up more for their celebrations. Moreover, budgeting is an alien concept, and spending can spiral out of control. Credit card is an obvious attraction to cover the inevitable shortfall in resources. There are advantages to using the card to finance your expenditure:

  1. It gives you free access to about a month of credit.
  2. It temporarily allows you to spend beyond your current means.
  3. It allows you to track your expenditure.
  4. You do not have to carry lots of cash.

The use of credit cards, however, does carry with it significant dangers if it is not carefully controlled. Research indicates that spending could increase by up to 35% when using a credit card compared with using cash. Here are some fundamental principles to help you guard against running into credit card debt trouble.

Spending Plan

If your spending exceeds your income for the festive month, consider cutting intended favorable expenses or other expenses to stay within your income. I’m assuming you’ve figured out your spending plan for that period—that is where a credit card comes to the rescue. Though not readily apparent, using your credit card can create distortions in managing your finances. Unless you monitor your spending in both cash and credit, there is a danger that you will be uncertain whether or not you are living within your means. It would therefore be unwise to begin using a credit card if you are not in control of your finances, which means using a spending plan.

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Debt to Income Ratio

Remember that use of your credit card adds to your indebtedness. In managing your financial affairs, one of the key indicators to watch is your debt-income ratio. This is monthly debt repayment as a percentage of your monthly after-tax income and raises a red flag when you tinker with too much debt. A proportion of over 20% is becoming unhealthy. If you already have overdue credit card debt, do not add to it.

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Bridging Finance

Using a credit card is ideally a means of short-term financing of your operations. That means settling any debt incurred using your card within days. Paying the minimum balance will not do. If you are not confident that you can pay it off in full, you will do yourself a huge favor by not using a credit card. Should you decide to go ahead and use a card, you need to be prepared for extra costs in interest and penalties associated with extended credit. This adds to your expenses, and you must be ready to reduce another regular fee to accommodate this. Otherwise, you run the risk of creating ongoing hard-core debt.

Net Worth

Credit card debt that accrues during the holiday season is usually allocated to consumer spending (vacation payments, gift purchases, entertainment, travel expenses, etc.) creating what is known as consumer debt. This type of debt increases debt but adds nothing to wealth. Your net worth is reduced by the amount of consumer debt incurred. Shrinking assets is not good for your financial health. Have a nice holiday. But if you do work on it, fund it in a way that gives you peace of mind that you won’t be in debt the next month.

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