The holiday season has arrived. It is time to celebrate, make
merry, and have fun. Travel plans have been made, lists of gifts
for family and friends have been drawn up, and arrangements for
parties 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 to
maximize their sales and profits. It will be high season for
them. They will stock up, price up and smile all the way to the
bank. They know that people will be less restrained in their
suspending than at any other time. It possible that you may be
among the many who have suffered post-holiday season financial
stress, and want to make sure it does not happen again. Your
success in this will be determined by how well you control three
critical factors: your increased rate of spending, the manner in
which you finance that spending, and the heavy financial demands
that follow in the subsequent month.
Financing Using Plastic
With holidays like Christmas or the New Year seeming to come
round too quickly, people often find they have not saved up
enough for their celebrations. Moreover, budgeting is an alien
concept during this and spending can spiral out of control. To
cover the inevitable shortfall in resources, the credit card is
an obvious attraction. There are advantages to using the card to
finance your expenditure:
i) It gives you free access to about a month's credit.
ii) It gives you the temporary ability to spend beyond your
current 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 significant
dangers if it is not carefully controlled. Research indicates
that spending could increase by up to 35% when using a credit
card compared with using cash. Here are some key principles to
help you guard against running into credit card debt trouble.
1. Spending Plan
If your spending is going to exceed your income for the festive
month, consider cutting intended festive expenses, or other
expenses, to stay within your income. I am assuming you have
drawn up your spending plan for that period. That's where a
credit card comes to the rescue. Though not readily apparent,
the use of your credit card can create distortions in the
management of your finances. Unless you are monitoring your
spending in both cash and credit, there is a danger that you
will be uncertain whether or not you are living within your
means. It would therefore be unwise to begin using a credit card
if you are not in control of your finances, that means using a
spending plan.
2. Debt to Income Ratio
Do not forget that use of your credit card adds to your
indebtness. In managing your financial affairs, one of the key
indicators to watch is your debt-income ratio. This is monthly
debt repayment as a percentage of your monthly after-tax income,
and raises a red flag when you tinker with too much debt. A
ratio of over 20% is becoming unhealthy. If you already have
credit 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 financing
of your operations. That means settling any debt incurred using
your card within days. Paying the minimum balance will not do.
If you are not confident that you can pay it off in full, you
wound do yourself a huge favor by not using a credit card.
Should you decide to go ahead and use a card, you need to be
prepared for extra costs in interest and penalties associated
with extended credit. This adds to your expenses, and you need
to be ready to be ready to reduce other regular expense to
accommodate this, otherwise you run the risk of creating ongoing
hard-core debt
4. Net Worth
Credit card debt incurred during the festive season is usually
for consumer spending- paying for your holiday, buying gifts,
entertainment, traveling expenses, etc and creates what is known
as consumer debt. This kind of debt adds to your liabilities,
but contributes nothing to your assets. Your net worth is
reduced to the extent of consumer debt incurred. Shrinking net
worth is not good for your financial health. So do have yourself
a happy holiday. But as you go about it, finance it in a way
that gives you the comfort that you won't be debt-laden the
following month.
About the author:
Gerald Njuguna is the owner of
http://www.CreditCardPerfection.com, a site which teaches people
on
how to apply
for a credit card. Visit the site, view more information on
credit cards and apply online.
