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5 Tips to Avoid the Holiday Credit Card Trap

Here’s how to keep your spending and debt in check as interest rates soar


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Beware of the credit card Grinch when you do your holiday shopping: Interest rates on credit cards have hit new record highs, according to Bankrate.com.

To make matters worse, the sky-high interest costs of buying gifts or even everyday essentials come when the average balance per consumer is at its highest level in 10 years, according to credit agency TransUnion’s third-quarter 2023 Credit Industry Insights Report.

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“Consumers are increasingly turning to credit cards as they look to manage their everyday finances and to help make ends meet,” said Charlie Wise, senior vice president of global research and consulting at TransUnion. “What we’ve seen is a continued rise in the level of outstanding balances.”

Retirees living on fixed incomes must be especially careful not to take on credit card debt they can’t repay if they want to avoid getting hit with high interest costs and falling into debt, Wise says. “If you have a lot of holiday spending and it takes an extra month to pay stuff off, that’s fine,” said Wise. “But don’t continue to rack up your balances on your credit cards unless you have the ability to pay those off down the road.”

Record rates, usage

Just as consumers are getting ready to start their holiday spending, the average retail credit card rate has skyrocketed to a record 28.93 percent, according to Bankrate’s annual Retail Cards Study. It’s not uncommon to see APRs north of 30 percent on some credit cards, especially those issued by some chain stores.

At the same time, the average debt per credit card borrower hit a 10-year high of $6,088 in this year’s third quarter, up 11.2 percent from $5,474 a year ago, according to the most recent data from TransUnion. The Federal Reserve Bank of New York says total credit card debt topped $1 trillion for the first time ever in the second quarter and totaled $1.08 trillion at the end of the third quarter.

The biggest driver of soaring credit card interest rates has been the 11 rate hikes from the Federal Reserve since March 2022 in its fight against inflation. “When the Fed increases rates, it impacts all lending,” said Jordan Mangaliman, CEO of GoldLine Financial. “It increases the cost of borrowing for the banks, which then increases the interest on bank products like credit cards, home loans and auto loans.”

The rising costs to buy life’s essentials due to the highest inflation in 40 years has also made it harder for many Americans to make ends meet, forcing them to rely on credit cards to buy what they need.

Not always bad to charge

Using credit cards, of course, isn’t always a bad thing. For those who can pay off their balances in full every month and take advantage of credit card offers such as cash-back on purchases, travel rewards and other perks, the use of plastic can be beneficial.

The credit card users most at risk of getting into financial trouble due to record-high interest rates are people who rely on plastic to make ends meet and can’t pay them off in full each month. They face hefty interest charges because of carrying a balance, says Andrew Wood, a retirement planning adviser at Daniel A. White & Associates.

This is not a tiny fraction of users: 168.6 million consumers carried a credit card balance at the end of September, according to TransUnion. “Typically, the credit card users who maintain high balances and [face] high rates often find themselves in what seems to be a never-ending cycle where they can’t seem to make any headway to bring their balances down,” said Wood. “Even if they stop using those cards for future purchases, high interest rates continue to hold back on progress on actually paying down the debt.”

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Last year, credit card companies charged consumers more than $105 billion in interest, according to the Consumer Financial Protection Bureau (CFPB). More cardholders are carrying balances month to month or falling behind on payments, the CFPB says, and a greater percentage of balances are going more than 180 days delinquent.

Don’t just make the minimum payment

For example, a credit card account holder who carried the average debt of $5,947 at the end of the second quarter at the average interest rate of 20.72 percent and only made minimum payments each month would be in debt for 212 months, according to an analysis prepared by Ted Rossman, senior industry analyst at Bankrate. “That’s more than 17 years [in debt], and your interest bill would be $1,819.”

Given that Americans celebrating the holidays this winter will spend $875 on average for gifts, decorations, food and other seasonal items, according to the National Retail Federation, now’s the time to plan a budget and map out ways to get through the holiday season without taking on expensive credit card debt. “The biggest danger of high credit card rates is becoming dependent on swiping your credit card,” said Mangaliman.

Avoiding the credit card trap

So, what’s the secret to keeping credit card debt at bay, or at least at a level that won’t impair other parts of your financial plan in retirement? Here are five ways to beat the credit card debt trap.

1. Avoid spending money you don’t have

If at all possible, try not to buy things on credit that you can’t afford to purchase with cash. “Don’t use a credit card if you are using it to spend beyond your means,” said Ross Mayfield, investment strategy analyst at investment firm Baird Wealth.

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2. Stick to your budget

It sounds basic, but creating a budget and sticking to it can keep you from shopping till you drop and racking up big credit card bills you’re unable to pay off when your statement hits. Make a list, check it twice and try not to add to it. “By tracking your income and expenses, you avoid buying things you don’t need” or overly expensive gifts, said Mangaliman. “Avoiding impulse purchases will also help you stay out of credit card debt.”

3. Think twice before signing up for a new card at checkout

It’s not uncommon for store check-out clerks to try to entice you into signing up for a new store credit card that carries a sky-high rate after the introduction period with the lure of a discount on your purchase, no payments for a certain number of months, or a 0 percent card offer for a set time. While it’s nice to get 25 percent off on the spot or a no-interest card for 12 months, you should think long and hard before taking the store up on its offer.

“These cards come with expensive offers in order to get the card into people’s hands, and that’s not by accident,” said Howard Dvorkin, a CPA and chairman of Debt.com. “It’s very enticing when you’re standing at the register and the clerk says, ‘Can I interest you in a credit card you don’t have to make payments on for a year?’ ”

The problem is if you don’t pay the balance in full by the end of the honeymoon period, say a year or 12 months, you could end up paying 30 percent or more on all the past-due interest that has accrued on your balance, warns Dvorkin. “God forbid you’re 30 seconds late when the payment is due,” said Dvorkin. “All of a sudden you pay your card 366 days later, and you’re going to being paying $1,300 for the $1,000 you charged.”

“Avoid using retail credit cards,” Dvorkin said, “unless you’re 1,000 percent certain that you can pay off the card when the bill comes in. It’s a trap. So don’t fall for the trap. And for people who take advantage of the offer, make sure you pay it off a month before the [introductory period] ends.”

There are times when a store card could make sense, adds Mangaliman. Having a store card for a store you regularly shop at, such as Target or Costco, that enables you to take advantage of perks like cash-back benefits is OK if you pay your statement off in full each month to avoid interest charges.

4. Lower interest costs with balance transfers

If you’re carrying a balance on a card with an interest rate of 20 percent or 30 percent and you get a 0 percent balance transfer offer that lasts six to 12 months, it could net you big savings on interest. “This could save you hundreds or [even] thousands of dollars,” said Mangaliman.

But there’s a caveat. You must come up with a payment schedule that ensures that you pay off the amount of the balance transfer by the end of the introductory period to avoid getting hit with a big interest charge on the back end of the offer.

For example, if you roll over $2,400 to a 0 percent card for 12 months, make payments of $200 per month for 12 months to pay the bill off in full. “Writing down your zero-balance objective and a specified target date [to pay it off] can be helpful,” said Steven Conners, founder and president of Conners Wealth Management.

5. Don’t think high savings account rates will bail you out

Sure, earning 5 percent on your cash sitting in a money market account sounds great. But it’s not nearly a sizable enough return to offset the interest payments on credit cards that charge upwards of 20 percent. “A money market [account] paying in the 4 percent to 5 percent range is meaningless if you have credit card debt,” said Conners. “If you’re hypothetically paying 19.99 percent in interest and you earn 5.20% in a savings account, you’re still losing the 14.79 percent difference.”

Another way to reduce your interest payments on credit cards is to consider using a personal loan or home equity loan, which charge much lower interest rates, to pay off the cards, says TransUnion’s Wise. “It also is going to give you a much more certain repayment schedule,” said Wise.

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