'Tis the Season.....for Credit Cards!

This holiday season we will spend over $3 Trillion on retail products and services for gifts-- a lot of which will be bought with a credit card.  Statistica.com reports that $122 million will be purchased on cyber Monday - that's probably almost exclusively credit cards. Fifty-six percent of people report buying gifts online which usually requires the use of some kind of credit card.  A lot of people are wondering -- is this a good thing or a bad thing?  To help answer this question, I've put together some tips and red flags associated with credit card and holiday spending habits.

First off, some positives about credit card usage:

• It's convenient.
• Many cards offer rewards or cash back.
• My favorite - it provides visibility into your spending habits.  Your monthly statements (or sometimes annual reports) offer a quick snapshot into your spending that cash can not (unless you keep a detailed ledger of your cash expenses which most people do not).

But, there are some drawbacks:

• Credit card spending can leave you vulnerable to identity theft particularly when using your card online.
• The convenience of easy purchases fosters mindless spending in many people leading them to spend more.
• If you do not pay off your card each month, you will likely incur heavy interest and that can leave you in a debt trap!  

How do I know if the positives outweigh negatives or vice versa or not?  Here are some red flags that indicate you should not use credit cards except in emergencies:

• If you open the statement and you're repeatedly shocked at how much you spent.
• If you can’t routinely pay off the balance of the card. (Data suggests 70% of the Christmas spending will be paid off in the first month but that means 30% will not!)
• If you’re paying considerable interest and fees.
• If your account information is stolen or infiltrated in some way consistently.

If even one of those red flags applies to you, an alternative is the envelope method. Dave Ramsey made this very popular but it’s actually been around for a while. If cards are causing you a problem, you might need to go back to old-school cash. The best way to use cash and still know where that cash goes is to budget yourself a certain dollar for each category. You separate out the dollars for that category into a separate envelope. For example, if you have budgeted $500 for groceries you would label an envelope groceries and put $500 in there. Now you can visibly see where the money is going. It’s a visual trigger for your mind to know you need to be more conscious of your spending activity. For a lot of people, that physical reminder is really critical for them to be able to control particularly impulse spending.  

This could certainly work for Christmas spending -- you'd decide you're going to spend $1,000 for example and you'd go ahead and put that in the envelope now.  Meaning, right now because Christmas is bearing down on us like a lion!  Go to the ATM and get out your envelopes quickly before your money gets devoured!

In all seriousness, my goal here is not to be Scrooge but rather help you think a little more long-term about the decisions you make this holiday season. You don’t want to be one of those people that opens your January credit card statement to be shocked at the amount and then have to find a way to pay it.  Just make yourself a little plan for this season. Whether that involves the use of credit cards or not, just being a little bit more thoughtful about what you spend can carry you off to a good start in 2018.

Happy Holidays to everyone!