Don't Let Credit Cards Ruin the Holidays

Today's guest entry comes from Dawn Handschuh, who has earned a living putting pen to paper for 25 years. She worked for 10 years in financial services, writing widely on retirement planning, personal finance and specific investment products such as annuities, mutual funds and 401(k) plans. Dawn is also a regular contributor at CreditFYI.com, a one-stop destination into the world of credit and personal finances.

As we approach the final holiday sprint toward the big day, the rush is on to wrap up our holiday shopping. In addition to the usual pressure to find the "perfect" gifts for family and friends, this year we're facing a relentless come-on by retailers who are doing whatever they can to fend off slumping sales.

Maybe you've noticed those poor souls on street corners holding up store liquidation signs for Linens 'n Things. I'm having an Andy Rooney moment wondering why LNT thinks having some guy freeze his tail off with a sign is going to get me in the door faster than an ad. 

As a Macy's cardholder, I've been collecting a growing number of Star Rewards cards this month promising $15 off a $50 purchase or $25 off a $100 purchase. And I got a $10 coupon, "our birthday gift to you," to use this month. (My birthday's in August.) The coupons are only good if you charge your purchases onto your Macy's card.

In my reluctant foray into the mall last weekend, every store posted unnaturally cheerful greeters at the entrance. The vendors selling their wares from those little carts in the atrium were in-your-face aggressive, reminding me of the rug dealers I encountered on the sidewalks of Tijuana.

Now don't get me wrong -- I love a sale as much as anyone. But while you may get some "deals" this holiday season, you could also wind up with one heck of a shopping hangover, one that lingers well into 2009. Just as bad, a credit card-enabled gift-giving frenzy could do serious damage to your credit.

Since your credit history in large part determines how much you'll pay in interest whenever you apply for a loan, it makes sense to preserve your good credit. Conscientiously paying your bills on time helps, but wise use of credit cards will also improve your creditworthiness.

Many credit card issuers are pulling back credit limits, shortening grace periods and hiking rates and fees. Consider the possibilities: If your credit limit is lowered, your holiday shopping spree could increase the ratio between your debt utilization and available credit, thereby hurting your credit. Generally speaking, using more than 30% of your available credit can damage your credit score.

By the end of June this year, the average household credit card debt in America was $8,565. I'm hoping the recession has prompted consumers to start paying down debt, but even so, maybe it's time to go easy with the credit cards and head into the new year without incurring any new credit card debt.

Here's how to keep a lid on your holiday spending:

• Don't be tempted to open a new store credit card; resist the lure of "10% off your holiday purchase" offers. Lenders frown on too many credit cards, and if you can't pay it off in your next billing cycle, you'll pay extra in interest.

• Pay in cash, and keep the credit cards at home. You'll do a much better job of reducing your spending.

• Use debit cards cautiously. By using a debit card that automatically deducts purchases from your checking account, you'll avoid racking up high-interest credit card debt. But debit cards carry their own risks, like emptying your bank account to buy a new plasma TV with money earmarked for the mortgage.

• Create a holiday budget, and stick to it.

• Take advantage of layaway options, which are making a comeback in some stores. You may have to pay a small fee to pay in installments.

• Buying more of your gifts online can limit impulse purchases and allow you to comparison-shop at your leisure.

• Be sure to mail credit card payments before leaving on an extended trip to Grandma's.

• Don't let feelings of guilt or obligation compel you to spend more on gifts than you should.

• And next year, think about opening a dedicated holiday savings account and funding it with automatic payroll deductions. While others may be dreaming of a white Christmas, here's to a "holiday season in the black" for all of us!