The holidays are fast approaching, and with them comes increased consumer spending. A recent survey by Coinstar found that 77% respondents said they will go over budget, despite diligent planning. One in five expect to rely on a credit card for at least a part of their shopping.
In most cases, it makes sense to put most, if not all, of your purchases on plastic. With the right card, consumers get to earn miles, cash back, and a host of other perks that banks are ponying up as incentives.
Unfortunately, it's not as simple as it sounds. Credit cards are a complex financial tool, and while you can certainly wield them to your advantage, there are certain considerations to be aware of.
Credit cards are one of the most expensive ways to finance purchases.
Data from the Federal Reserve shows that the average credit card interest rate currently sits at about 15%. While it's not as high as predatory products, like payday loans, it's still quite high. To put these numbers in perspective, credit card interest rates are, on average, 33% higher than those found on personal loans. Things get even worse for individuals with bad credit. Interest rates for subprime cardholders frequently climb over 20%.
As a result, you shouldn't charge things to your credit card unless you plan to pay everything off at the end of the month. The less you pay, the worse off you'll be. Cardholders who can only afford the minimum payment may very well end up dealing with their debt for years, thanks to how the high interest rates compound your debt.
The only way around this problem is to use low-interest credit cards that offer 0% APR.
However, even these should be approached with caution. One late payment could cause your interest rates to spike.
Credit card may predispose you to pay more.
A 2001 paper from the Sloan School of Management at MIT showed that credit cards can make individuals pay more for the same item. Study participants were willing to pay roughly twice as much as cash-only shoppers, when paying with a credit card was an option.
Major upcoming shopping events, like Black Friday, are centered around deals and discounts. However, if you introduce credit cards into the mix, consumers may very well lose sight of what constitutes a reasonable deal in their eyes. In an interview with The New York Times, Duncan Simester, one of the principal researchers in the study, said that when “you’re not forking over a dollar bill, there is less sensation of loss.”
Your credit card information may be stolen.
Cybercrime has become more prevalent in the last two years. Thieves are turning to the internet as counterfeiting physical credit cards becomes harder due to improved anti-fraud technology, like EMV smart chips. Ebay, Home Depot, Staples, Domino's Pizza, Sony and Target are just some of the major retailers that suffered breaches in the last few years. It'd be foolish to suggest fraud alone should stop anyone from using their credit cards. Laws and issuer policies mean there is virtually no financial burden to having your credit card information stolen. At worst, today such an occurrence is a mild inconvenience. However, that doesn't mean you should ignore it completely.
It is crucial is for you to closely monitor your credit card statements for fraudulent purchases. You don't pay for fraudulent purchases only if either you or your card issuer notices and flags them as such. With increased activity on your card during the holidays, it may become harder to notice if your balance is higher than normal. Make sure to scrutinize every bill so that fraud doesn't go unnoticed.
Maxime Rieman is Product Manager at ValuePenguin. Educating and assisting shoppers about financial products has been Rieman's focus, which led her to joining ValuePenguin, a consumer research and advice company based in New York. Previously, she was product marketing director at CoverWallet and launched the personal insurance team at NerdWallet.
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