4 Principles to Follow to Avoid Credit Card Debt During the Holiday Seasons The holiday season has arrived. It is time to celebrate, makemerry, and have fun. Travel plans have been made, lists of giftsfor family and friends have been drawn up, and arrangements forparties are in full gear. It is indeed the season to be jolly,but also the season when spending runs wild.
Business people usually cash in on the holiday seasons tomaximize their sales and profits. It will be high season forthem. They will stock up, price up and smile all the way to thebank. They know that people will be less restrained in theirsuspending than at any other time. It possible that you may beamong the many who have suffered post-holiday season financialstress, and want to make sure it does not happen again. Yoursuccess in this will be determined by how well you control threecritical factors: your increased rate of spending, the manner inwhich you finance that spending, and the heavy financial demandsthat follow in the subsequent month.
Financing Using Plastic
With holidays like Christmas or the New Year seeming to comeround too quickly, people often find they have not saved upenough for their celebrations. Moreover, budgeting is an alienconcept during this and spending can spiral out of control. Tocover the inevitable shortfall in resources, the credit card isan obvious attraction. There are advantages to using the card tofinance your expenditure:
i) It gives you free access to about a month's credit.
ii) It gives you the temporary ability to spend beyond yourcurrent means.
iii) It allows you to track your expenditure.
iv) You do not have to carry lots of cash around with you.
Use of credit card, how ever, does carry with it significantdangers if it is not carefully controlled. Research indicatesthat spending could increase by up to 35% when using a creditcard compared with using cash. Here are some key principles tohelp you guard against running into credit card debt trouble.
1. Spending Plan
If your spending is going to exceed your income for the festivemonth, consider cutting intended festive expenses, or otherexpenses, to stay within your income. I am assuming you havedrawn up your spending plan for that period. That's where acredit card comes to the rescue. Though not readily apparent,the use of your credit card can
create distortions in themanagement of your finances. Unless you are monitoring yourspending in both cash and credit, there is a danger that youwill be uncertain whether or not you are living within yourmeans. It would therefore be unwise to begin using a credit cardif you are not in control of your finances, that means using aspending plan.
2. Debt to Income Ratio
Do not forget that use of your credit card adds to yourindebtness. In managing your financial affairs, one of the keyindicators to watch is your debt-income ratio. This is monthlydebt repayment as a percentage of your monthly after-tax income,and raises a red flag when you tinker with too much debt. Aratio of over 20% is becoming unhealthy. If you already havecredit card debt that is overdue, do not add to it.
3. Bridging Finance
Use of a credit card is ideally a means of short- term financingof your operations. That means settling any debt incurred usingyour card within days. Paying the minimum balance will not do.If you are not confident that you can pay it off in full, youwound do yourself a huge favor by not using a credit card.Should you decide to go ahead and use a card, you need to beprepared for extra costs in interest and penalties associatedwith extended credit. This adds to your expenses, and you needto be ready to be ready to reduce other regular expense toaccommodate this, otherwise you run the risk of creating ongoinghard-core debt
4. Net Worth
Credit card debt incurred during the festive season is usuallyfor consumer spending- paying for your holiday, buying gifts,entertainment, traveling expenses, etc and creates what is knownas consumer debt. This kind of debt adds to your liabilities,but contributes nothing to your assets. Your net worth isreduced to the extent of consumer debt incurred. Shrinking networth is not good for your financial health. So do have yourselfa happy holiday. But as you go about it, finance it in a waythat gives you the comfort that you won't be debt-laden thefollowing month.
About the author:
Gerald Njuguna is the owner ofhttp://www.CreditCardPerfection.com, a site which teaches peopleon
how to applyfor a credit card. Visit the site, view more information oncredit cards and apply online.
