What type of credit card should you use this Christmas?
How to save on interest, reap rewards and avoid debt when paying with plastic this Christmas.
In October 2016, 27.99% of Australians had already started their Christmas shopping, according to a finder.com.au survey. Meanwhile, the rest of us will start from the first week of December up until the night before Christmas to grab our last-minute gifts.
Regardless of when you decide to do your Christmas shopping, Australians are predicted to spend a combined $10 billion on gifts this silly season. This averages out to $539 per person. If you’re planning on using a credit card this Christmas, that’s a lot to charge to your account in one month.
It’s no surprise that Aussies are splurging around Christmas, though. In December 2015, the Reserve Bank of Australia (RBA) revealed that the nation borrowed a whopping $27.5 billion on credit cards for purchases and cash-out transactions before Christmas. $3.2 billion of these transactions were for gifts, leaving the average Australian with an average debt of $1,668 each and a collective balance of $286 million.
So while credit cards can be a convenient way to manage your cash flow and get some extra financial support around Christmas time, how can you get the most out of your card while avoiding the post-December debt hangover?
Here we’ll look at some of the different types of credit cards you could use before and after Christmas to ensure you can tick off all the items on your gift list without breaking the bank.
0% purchase credit cards for cost cutters
Using a credit card to cover your Christmas costs can be a convenient way to get the shopping done without blowing your savings account. However, as last year’s post-debt Christmas hangover shows, it’s easy to fall into debt once you start paying on plastic. If you mainly want to use your credit card for purchases over the Christmas season, this is where a 0% purchase credit card could come in handy.
You can access a variety of 0% purchase credit cards for 6 to 15 months on the Australian market. This means that the purchases you make on the card won’t collect any interest for the duration of the promotional period. So if you get a 0% credit card in December, you would have until at least May to pay off the balance on your card without incurring any interest. While you’ll only be required to pay the minimum repayment each month, it’s best to pay off as much as you can each month to ensure the balance is paid in full before the promotion ends. Otherwise, any remaining debt will start attracting the standard interest and your debt will begin to grow.
Let’s say you spent the average $539 on Christmas gifts this year. If you were to use a card with 0% interest offer for the first six months, you’d need to pay approximately $89.43 each month to pay it off before the introductory offer ended. If you had a card with a standard interest rate of 20.74% and you only paid the minimum repayment of 2% of your monthly balance, you'd only have to pay $10.78 in the first month. However, in that same month, you'd incur around $9.32 in interest charges, meaning you'd have effectively gained nothing. The key lesson? Pay off as much as you can while the interest rate is low.
Frequent flyer credit card for big spenders and rewards seekers
If you regularly repay your balance in full each month, the threat of interest might not be an issue for you. Instead, you might want to consider a frequent flyer credit card that earns rewards for every dollar you spend on Christmas gifts.
Currently, a few Australian credit card issuers are encouraging new customers to sign up before the Christmas period with the promise of bonus points. For example, American Express Explorer Credit Card applicants can earn 100,000 bonus points when they spend $1,500 within the first two months of approval and 2 points per $1 spent on eligible purchases thereafter. Citi takes the cake for the highest bonus points, though, offering up to 150,000 bonus points for cardholders who apply for the Citi Platinum and Signature cards before 22 November and meet the spend requirements. Citi cardholders will also earn up to 1.5 points per $1 spent on accepted purchases. The spend requirement to earn these bonus points (including the annual fees) is less than the average Christmas spend of most Australians, so this could be one way to pick up extra value from your card over Christmas and in the months following.
With the American Express Explorer Credit Card, you could earn 1,078 Membership Rewards with the earn rate of 2 points per $1 spent if you spent the average $539 on Christmas gifts this year. If you traded these Membership Rewards for Virgin Velocity Points (at an exchange rate of 1:1), you could almost redeem $10 off your next fuel purchases at BP (1,667 Velocity Points per $10 worth of fuel). Plus, if you spend more than the average Aussie at Christmas and meet the bonus points spend requirement within the first three months, you could boost your balance by an extra 100,000 Velocity Points and redeem your flights for a one-way economy flight from Sydney to Los Angeles (worth 81,400 Velocity Points). As this flight would generally cost around$488.83, it could be considered rewarding if you were already planning on spending the qualifying $1,500, but it isn’t enough to outweigh the entire cost if you were spending for the sake of earning points.
As these frequent flyer rewards cards generally come with higher annual fees and interest rates, you need to factor these into your comparison to make sure that the costs don’t outweigh the value of the rewards.
If you’re a big spender who usually pays their credit card balance in full each month, you could get extra value from your Christmas earning by picking up points for every dollar you spend. Otherwise, you might want to consider a 0% purchase credit card to cut down interest costs rather than earn rewards.
0% balance transfer for post-Christmas debt
As we mentioned before, Australians had a post-Christmas debt of $1,668 after December 2015. If you’re unable to repay your balance or find your costs growing due to high interest after the yuletide season, you might want to consider a 0% balance transfer offer. With promotional periods varying from 12 to 18 months interest-free, you could move your existing Christmas debt to a balance transfer credit card with zero interest for at least a year. Similar to the scenario with a 0% purchase card, while you’re only required to pay the minimum repayment each month, you’ll benefit from paying as much as possible each month to pay your balance in full before the promotional offer ends. Otherwise, any remaining balance will collect the standard interest or cash advance rate once the introductory offer ends. See our guide on how to repay your post-Christmas debt with a 0% balance transfer for more information.
It’s fair to say that a credit card could be a useful way to cover your Christmas costs this silly season. However, if you don’t pick the right one, you could end up with debt-lag once the post-Christmas dust settles or could be missing out on the extra value that comes with paying on plastic to earn rewards. Regardless of how you plan to use a credit card this December, make sure you compare your options to find the right card for you this Christmas.