The Tipping List
Cash Comes Caroling
Why you should spend cash, not credit this holiday season
This year, more than ever before, people are using available cash rather than credit to fund holiday expenditures. Credit has been extended too far, and thousands of people are feeling the results of spending too much too often and not saving enough frequently enough. It’s time to face the (Christmas) music.
We are smack in the middle of what I like to call the “holidaze” and all its accompanying spending and needing to get that perfect gift for your second cousin twice removed and all those other super-close relatives. So, you’re glancing, or in some cases, staring fixedly, at your credit cards to see if they can tide you over until the spending press isn’t on. That music’s picking up speed, isn’t it?
Suddenly, the little warning bells that cue those catchy jingles about checking your credit report sound and you’re hoping to hold off any holiday-induced situation that they might be singing about in a future commercial. Dammit. That music’s gotten really annoying.
So here we are, trying to avoid it, and the easiest way to do so is to go in with your eyes open. What do you really know about what using your credit is costing you? Time to take a closer look with our handy dandy telescope, which is currently bedecked with Christmas lights and candy canes, and seek the answers to life … or at least what using that tempting little card’s going to cost you.
Where’re the extra costs?
First off, there’s the interest rate. The average credit card interest rate was 14.7 percent as of 2007. That’s another $14.70 per $100 purchase that you’ll be paying over time. If you’re of the mortgaged population – look at the interest rate on that. Most times one’s credit card interest rate is somewhere in the mid-teens. Mortgage rates – depending on when it originated, aren’t nearly that high. So if you really think about it in terms of percentages, rather than actual amounts, that extra purchase on your credit card carried over from month to month is costing you more than the principal on your house.
And then we move to the next, and probably the biggest – but avoidable, provided you keep track of payments and limits – cost when it comes to using your credit card. And those are the penalty fees.
These fees accrue for a number of reasons, up to and including going over your credit limit, making late payments, and the like. They are even more deadly in that not only can the individual fees stack up, but incurring such penalties can skyrocket your interest rate, to heights up to 32 percent. While the individual fees may not seem a lot, paying that 32 percent over time can certainly be so. If you’re sitting with a carried balance of $1,000, congratulations, that’ll be costing another $320.
So we get it. Interest rates, overall, are essentially a convenience charge. If you make the purchase now, but don’t have the cash on hand, you’re going to pay for it, one way or another. And if you’re not able to pay it off your credit card in the immediate to near future, those costs will keep climbing.
Now, don’t think that all cards are necessarily going to put you at risk of incurring charges you’d rather not pay. Don’t forget your debit card. While credit cards are borrowing against a line of credit established for you when you apply for the card, your debit card is linked directly to your bank account, in most situations, and essentially acts as plastic cash.
With cash, your available spending is lower, but it’s not going to accrue interest charges or penalty fees, or even appear on your credit report. While that may limit the amount that you can spend on various giftees, wouldn’t you rather keep within your means, instead of having irresponsible spending start spiraling out of control, causing increasing stress and possibly destroying relationships with friends, family, and significant others?
So, while it may not be palatable and means you don’t get that awesome pair of shoes or that must-have handbag for your sister in crime, spending only cash means you’ll be forced to stay within your means. Isn’t it a cozy holiday thought to be able to build or grow a nest egg that’ll be there should you ever need it? I can hear the carolers now …