Every year, thousands of Americans wake up with a holiday-credit-card hangover. A string of poor financial decisions can easily push one to start the New Year on the wrong foot. This guide outlines some of the biggest personal finance pitfalls one can fall into, and why it’s important to avoid them. As long as you steer clear of this, chances are you can avoid some headaches to come.
Carrying a Balance
One of the worst things you can do with your credit cards is to buy things you can’t afford. Credit card interest rates are through the roof. Even if you are someone with an excellent credit score, the best credit cards will charge you an APR of anywhere between 13% and 17%. That is a significantly higher premium than what you’d pay with other loan products – including mortgages, car loans, and student loans. The holiday season isn’t an excuse to carry a balance on your card. You should only charge things you know you can pay off at the end of the month. It’s a bad financial move to pay high interest just to get a new toaster for your great aunt.
Maxing Out Your Credit Cards
With so many purchases lined up during the holiday season, it is easy to lose track of one’s credit limit. However, in doing so, you run the risk of unintentionally (or worse yet, intentionally) maxing out your credit cards – something that can hurt your credit score. In building their credit-scoring model, FICO looks at something called ‘’credit utilization’’ as part of their risk calculations. Utilization refers to the percentage of one’s total credit line being used up. While FICO has not officially disclosed what kind of utilization is best, it is generally accepted that you don’t want to use more than 30% of your credit line. Utilization makes up a significant portion of your FICO 8 score. This can be a big problem for those who sign up for store credit cards. These typically come with lower credit limits, which makes driving up your utilization a much more likely event.
Taking Out a Cash Advance
While rare, some stores and retailers don’t accept credit cards as a form of payment. If you want to buy anything from a store like this, you should only pay for things by taking out cash from your account using a debit card. Unfortunately, some individuals engage in an expensive practice known as “cash advances” instead. This is the process of taking out cash from an ATM using your credit card, instead of a debit card. Why is this a problem? Cash advances have extremely high APR – significantly higher than regular purchase APR – and are frontloaded with fees. Avoid these at all cost, and don’t try to shortcut getting your hands on cash with these types of transactions.
Not Optimizing for Rewards
If you are like the average American, you currently have somewhere between 3 and 4 credit cards. Do you know which one to use when buying gifts or booking travel plans? If you answered “no”, don’t worry – you’re not alone. Many people routinely underutilize the credit cards they have. You should take a moment to figure out the best credit card to use before you head out to the store. Most rewards credit cards are highly specialized. They are designed to be rewarding in a select group of categories, like gas or travel.
Not Looking Through Online Shopping Portals
If you have a credit card from one of the major banks, chances are it has an online shopping portal you can log into. These will typically offer you better-than-normal rewards rates. For example, a credit card that gives you 2% - 5% cash back on a daily basis, can give you as much as 15% back through online portals. You can usually find good deals through large retailers, like Best Buy or Macy’s. If you were planning on doing any holiday shopping through these big chains, make sure to checkout these portals before you head to the store. You can then compare the online rewards with the discounts available in-store. This allows you to maximize your savings, and pick the option that’s best for you.
This story originally appeared on ValuePenguin.