Rethink Your Credit Cards For Holiday Spending

Now is an ideal time to take stock of your existing credit cards. What interest rates are you paying? What rewards are you earning? What changes can you make now, to make the holiday season more affordable and start off 2012 with the best cards in your wallet? Let's find out.

TUTORIAL: Credit And Debt Management

Interest Rates
If you expect to run up a balance on one or more of your credit cards this holiday season (which we do not recommend), do yourself a favor and put those balances on the lowest-rate cards you can get.

You may already have a card with a low, promotional APR. If not, you may want to apply for a new one. Make sure you're aware of when the promotional period ends and come up with a plan to pay your balances off, before your rate jumps. Also, start thinking ahead to next year. How can you set yourself up now, to minimize the interest you'll pay in 2012?

For starters, you can avoid running up a balance that you can't pay off right away, this holiday season. You should also take a look at the balances you're carrying on each card, and the interest rates you're paying on each balance. Come up with a plan that focuses on paying off your highest interest rate balances first. If you have the discipline to not take on additional debt, consider shifting balances from higher interest rate to lower interest rate cards. Don't forget to factor in balance transfer fees, which are often 3% of the amount you transfer. Make sure you'll still come out ahead after the fee. (For more on interest rates, read Understanding Credit Card Interest.)

Rewards
Take a look at all of your credit cards and see which ones offer rewards, then look at whether you're maximizing your rewards, given your existing spending habits. For example, if you have a card that offers a higher percentage of cash back on gas purchases, have you been putting all your gas purchases on that card? Do you need to order an extra card for your spouse, so he or she can charge gas purchases to that card as well? If so, make sure there's no fee to add an authorized user to your account.

If you have a card with rotating cash back categories, like Chase Freedom or Discover, did you take advantage of each promotion that was offered during the year?

You may have left rewards on the table when you made online purchases. Many credit cards will reward you with an additional percentage cash back, extra points or frequent flier miles, if you simply log into your account and click on a dedicated link to the retailer you'll be shopping with, before you make your internet purchase. Learn about these programs and plan to take full advantage of them, going forward.

Store credit cards are often an unnecessary addition to your wallet, but occasionally they make a lot of sense. For example, if you do a large percentage of your household's shopping at Target and plan to continue this pattern, getting a Target credit card that offers a 5% discount on all purchases, could bring you significant savings over the next year, assuming that you don't start increasing your spending as a result of the discount. (For more this topic, read Store Credit Cards: Do The Incentives Pay Off?)

Now is also an ideal time to consider cashing in on your rewards. With the increased expenses associated with the holiday season, cashing in credit card points and miles to help pay for holiday gifts, travel and other expenses, can help you stick to your budget and avoid starting the new year with new debt.

You might also consider applying for a new card or two that has a significant sign-up bonus. Make sure to only apply if you will realistically be able to meet the terms of a sign-up bonus. If the card requires you to spend $5,000 over six months to earn the bonus and your spending isn't normally that high, choose another card. Spending beyond your means to get a bonus doesn't make sense.

Finally, remember that credit card rewards are insignificant if you're carrying a balance. Getting 1% back while paying 17% in interest, won't get you very far.

The Bottom Line
Credit cards offer numerous opportunities to waste money or to come out ahead. If you want to be a savvy credit consumer, figure out how to minimize and eventually eliminate, your interest payments and maximize your rewards.





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