’Tis the (spending) season

How to keep your credit rating in good standing during the holidays.

The holidays can be a magical, yet expensive, time of year for many Canadians. In this season of giving, we are often tempted to overspend on gifts for loved ones. We attend more parties and social gatherings with friends, family and work colleagues. And with the kids on break from school, it’s also a popular time of year for travel.

Many people finance their holiday fun with credit cards. In fact, six out of 10 Canadians are willing to go into debt to purchase gifts.[1] It can be easy for holiday spending to quickly spiral out of control, and before you know it, you receive a credit card bill in January that you aren’t able to pay off right away. In a recent survey, three in 10 Canadians admitted that they struggle to pay off debt after the holidays.[2]

Using credit with care

Credit cards are made to be as convenient as possible to use and often offer attractive rewards and perks that provide added value to customers. If you manage them properly, you can earn rewards, keep interest and fees in line, and maintain a healthy credit rating so that lenders are willing to help you finance future large purchases, such as a home or automobile. Here are a few things to consider.

Choose the right kind of credit card

With so many options and fee structures available, do a little research before you sign up for a new credit card. What interest rate does the card charge, and does it have an annual fee? What is the cost for a late payment, and does the card charge extra for cash advances? What are the rewards, and are there insurance coverages or other benefits? If you expect to carry a balance, look for the card with the lowest fees and interest rates. If you plan to pay back your balance in full each month, select a card with rewards and benefits that resonate with you and provide maximum value.

Limit the number of cards you have

The number of cards in your wallet doesn’t weigh as heavily on your credit rating as the amount you owe. However, for someone who is just starting out or repairing a poor credit history, or who tends to max out their credit limit, one card is likely enough. Moreover, having multiple cards could expose you to a higher risk of fraud or identity theft. Opening or closing multiple cards at once may also reflect poorly on your rating, as lenders may wonder why so many credit inquiries appear on one profile.

What about rewards?

Credit card rewards can provide notable value, but sometimes the risks of overspending outweigh the rewards offered. Many cards come with points, travel miles, rebates and low interest rates on balance transfers – but they may charge higher interest rates or annual fees. Satisfying the terms and conditions to qualify for those rewards may also tempt you to make unnecessary purchases, counteracting the benefit of rewards. Know what you’re signing up for.

Pay off your balance as soon as possible

If you don’t pay off the balance owed each month, you will begin to accrue costly interest. And even if you can’t pay it all off right away, you need to make the minimum payment by the due date or you’ll put your credit rating at risk. You may want to consider setting up a preauthorized payment to automatically pay your card balance each month (or a portion of it). If your balance becomes difficult to pay down, talk to your advisor, who may be able to suggest methods to consolidate your debt at a lower interest rate. Consider retiring one or more of your cards to curb spending until repayments are back on track.

Protect your good credit rating

Simply put, lenders are more likely to loan money to borrowers who are more likely to repay. Most lenders will check a borrower’s credit score before approving a loan for a car, a home or another large purchase – and may decline an application or charge higher interest if they think you are a higher credit risk. Mortgage lenders especially like to compare outstanding debt with income levels to ensure there will be sufficient cash flow to honour monthly payments. To see what lenders see, request a copy of your credit report free from Equifax (www.equifax.ca) or TransUnion (www.transunion.ca). 

During this holiday season of spending, don’t let your credit card balance get out of control – your credit history is an important aspect of your overall financial health. For guidance on establishing and maintaining a good credit rating, speak with your advisor. 

Holiday gift ideas that won’t break the bank

	Draw names for gift purchases rather than everyone in your family buying a gift for everyone else.
	Create your own “gift certificates” that offer the gift of your time (a walk in the park, a home-cooked meal, etc.).
	Holiday baking is a classic for a reason, and is always a big hit.
	Start new holiday traditions with friends and family that let you spend time rather than money.
	Get crafty and make gifts from scratch. Knit a scarf, make a candle or design a calendar for the following year. And if your artistic skills are less developed, a framed photo is an easy project that is just as meaningful.

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