The winter holiday season is one of the busiest shopping times of the year. Most of us spend hundreds each season on gifts, decorations, and food. If you’re planning on putting the majority or even some of your holiday shopping on credit cards, however, you might want to rethink your strategy.
Putting holiday purchases on credit seems like a great way to buy everything you want now without having to empty your wallet or savings. When you add to your credit card balance, you end up paying much more for the things you buy than if you were to pay cash for two main reasons: interest and increased minimum payments.
Interest is the amount it costs to borrow money and is calculated by a percentage of your balance. The higher your interest rate, the more you pay over time for the balance you carry on your card. So let’s say you plan on putting $500 worth of holiday purchases on your credit card, then paying it off gradually each month. Your credit card carries an interest rate of 20%, and your minimum payment will be $15 every month.
Based on these figures, it would take you 50 months (just over four years!) to pay off the balance. Not only that, with interest, you will have paid $236 extra. The means you’re paying an extra $236 just to charge your purchase.
Charging purchases will also affect your minimum payment each month. Your minimum payment is not a fixed amount—it goes up and down depending on what your balance is. Minimum payments are usually calculated by determining 1% of your balance plus the interest. So, let’s say you currently carry a balance of $500 on your credit card that has a 20% interest rate. Your minimum payment is a manageable $15 a month.
But then you decide to have an extravagant Christmas and charge $1,500 to your credit card. Based on these figures, your minimum payment goes from just $15 a month to $53 a month. This may not sound like a lot, but not only does it cut into your monthly budget, it also means you’ll be in debt longer. A $2000 credit card balance would take 186 months (15 years!) to pay off, and interest payments alone would be over $2,700 a month—more than your initial purchases.
Based on these figures, you may be thinking it doesn’t make sense to charge up holiday purchases, especially when you’ll be paying more for them for years to come. So how can you avoid paying more around the holidays? These tips will help:
If you typically turn to your credit cards to cover your holiday expenses, think first. Charging big purchases not only leaves you in debt longer, but interest and minimum payments mean you’ll be paying for those purchases for years to come.