Holiday spending with credit cards: How much do you know about it?
Law You Can Use
Q: Is using credit cards for holiday spending a good or bad idea?
A: Using credit cards for holiday spending is neither good nor bad. If you do not pay off your monthly balance in full, then it is no different from borrowing money at any other time of year. The danger is that it is very easy to overextend yourself and incur more debt than you can afford to repay.
Q: Why do credit card companies seem so willing to extend me credit?
A: Extending credit is profitable. Each time you use a credit card, you are getting a loan from the credit card issuer. Credit card issuers earn interest on the money they loan you when you do not pay off the entire balance of your credit cards each month. The rate of interest charged by credit card issuers varies, but it is usually higher than the standard “market” rate. Credit card issuers earn the most interest when you make only the minimum payment shown on your bills.
Q: What are the advantages of using credit cards for my holiday purchases?
A: The first and most obvious advantage of using a credit card is that it allows you to purchase goods and services without having to pay for them immediately. Most credit cards allow a grace period within which you may pay for goods and services purchased on a card without paying any interest charges. This feature allows you to defer payment for your purchases, keep your funds in your savings account for an additional 30 days, and thereby earn interest on money that otherwise would have gone to purchase goods and services. In this way, purchases in December can be paid in January without costing any interest.
Q: Are there any disadvantages in using credit cards for holiday purchases?
A: Yes. If you do not pay off your credit card balance in full within the grace period, you are charged interest from the purchase date until the day you pay off your balance. Also, the interest rate on credit cards is greater than the market rate, so if you make only the minimum payment on your outstanding balances, you pay the maximum in interest while not greatly reducing the principal amount of your debt. If you make only minimum payments, you could still be paying for this year’s holiday when the next holiday season rolls around.
Q: What happens if I can’t make the minimum monthly payment or pay off my credit cards?
A: If you have charged beyond your ability to pay, the credit card issuer will take action to collect the debt. The action may be limited to reporting the debt to credit bureaus, increasing your interest rate to an even higher penalty rate, or it may involve taking legal action. If you have incurred debt, you must realize that you cannot simply ignore the problem. Most credit card issuers offer an option to make a “minimum monthly payment” on credit card purchases. As long as you make the minimum monthly payment on time, and you have not exceeded your credit limit, the issuer cannot take legal action to collect the amount due. If, however, you cannot make the minimum monthly payment on a given credit card, or you have made late payments or have exceeded your credit limit, your options are limited. A good first step is to contact creditors directly to try to work out a payment plan. Another alternative if you have multiple credit cards is to seek help from a credit counseling service. A credit counseling service will try to help you devise a plan to pay off the debt and to budget your resources, typically for a small fee. If consumer credit counseling cannot solve the problem, then it may be time to consult an attorney to determine whether or not bankruptcy is an appropriate solution. You should not take this option lightly. Many attorneys will conduct an initial consultation with you to determine for no charge whether or not you are a candidate for bankruptcy.
Q: If I charge something on a store credit card and don’t pay the bill, can the store take back what I bought?
A: This can happen. A creditor (such as a department store, jewelry store, hardware store or electronics store) can enforce a security interest on credit card purchases. For example, if you charge goods with a store credit card but fail to pay for them, the creditor may be able to take back the goods.
Law You Can Use is a weekly consumer legal information column provided by the Ohio State Bar Association (OSBA). This article was originally prepared by Canton attorney Anthony DeGirolamo and Robert Stefancin, a principal in the Cleveland office of Ice Miller LLP. It was updated by DeGirolamo. Articles appearing in this column are intended to provide broad, general information about the law. Before applying this information to a specific legal problem, the OSBA urges readers to seek advice from an attorney.
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