Americans can be generous – to a fault – and that character trait is never more evident than during the holiday shopping season.
At this time of year, millions of people put their financial common sense on the shelf, tucking it away into a winter hibernation of sorts, thereby making it much easier to take part in the once-per-year phenomenon known as Black Friday, the mother of all shopping days. The problem with this practice is financial reality is just around the corner, never failing to emerge in January as a mailbox full of credit-card statements.
Here are just some of the ramifications of overspending:
• Adding new debt on top of old is never a good idea, yet many people will enter the 2013 holiday shopping season still paying for 2012 purchases. When debt is carried over from month-to-month, cardholders lose the benefit of a grace period, the time during which a person can pay the monthly credit-card bill before interest begins to accrue. When debt is revolved, new purchases begin to incur interest immediately.
• Paying interest on the interest occurs when debt is carried over from month-to-month. When a debt is not paid in full by the due date, interest is added to the balance. This amount adds up over time, creating an impediment to becoming debt free.
• Late fees and over-limit fees can cause balances to grow to an unmanageable level. Issuers may charge a late fee of $25 with the first late payment, and with 45 days notice, increase the Annual Percentage Rate to a higher interest rate on new purchases. However, consumers who make late payments more than once in a six-month period may be assessed a higher late fee with the penalty APR also applied to existing balances.
• An inability to pay as agreed could result in negative notations on a person’s credit report, with late or missed payments remaining on the report for seven years. Furthermore, the all-important credit scores are based on information in the credit report. Along with other factors and depending on the extent of the delinquency, the drop could be by as much as 100 points.
• Less credit will be available on existing cards. Credit cards have a spending limit beyond which the user cannot charge without penalty. Since no one knows what tomorrow holds, over-utilizing open lines of credit can leave a person without a credit safety net for future purchases, unplanned expenses or emergencies.
Other adverse consequences of overspending may include diminished access to new or additional credit; diminished funds for saving or investing; serious consequences including collection efforts, lawsuits, judgments and wage garnishment; and desperate choices such as bankruptcy or debt settlement. In addition, other life decisions may be adversely affected by a person’s inability to manage debt making a long-term negative impact on future borrowing power.
For a quick and easy snapshot of your current financial picture, use the free online financial self-assessment tool at www.MyHolidayCheckUp.org. Doing so in advance of holiday shopping positions you to make wise spending decisions, a gift that will last long beyond the holidays. For help constructing a workable holiday budget, or to discover how to pay off existing debt, visit with an NFCC-certified financial professional at www.HelpWithMoney.org or 1-800-450-4019.