I love making holiday gift lists—but a holiday budget, not so much. This tends to translate into the use of various "creative financing" tactics—some of which work out better than others. Recently, I got curious about whether the mistakes I make again and again are common ones. As it turns out, they are! Here are the top financing "oopses" shoppers make—here's hoping this list will help you steer clear of each this year!
1. Opening a new line of credit just to get a deal
Whether the new line is a store card or a credit card, too many consumers forget all about their credit score when opening new holiday credit lines.
Here are examples of how a new credit line may impact your score:
- Any credit application will result in a "hard credit inquiry," which will cause a temporary dip in your credit. (You especially want to avoid this if you have a big credit line application pending, such as a car loan or a mortgage!)
- Opening too many lines of credit can hurt your score, even if you are current with all balances.
- Opening a new line of credit you only plan to use on a special deal can reduce the "age" of your overall credit report by listing a new credit type with little/no activity.
- Opening a new line of credit you can't pay off can reduce your credit score (unlike an installment loan balance that has preset monthly payments).
- The only surefire way opening a new credit line will help your score is if that new line is unlike any other form of credit you have.
2. Pursing offers that sound "too good to be true"
The takeaway here is, if the offer sounds too good to be true, walk away. There’s just too much risk to be worth any potential reward.
Examples of “too good to be true” offer types:
- A $25 value gift card being offered for an ultra-low price (such as $10). Even heavily discounted legitimate gift cards seldom dip below 20% off (so $20 in this case).
- A coupon offer that basically gives you the item for "free" (it could be a counterfeit).
- A big name brand item with a rock-bottom price (it may be a knock-off).
- Any item that asks you to input financial data before you can take advantage of the offer (identity thieves are likely behind these offers).
3. Opting for "deferred interest" financing
I find these types of offers nearly impossible to resist—the saver in me crows with glee at the thought of getting "interest free" anything.
But financial experts say the only time these offers make sense is if the following three conditions can be met:
- You absolutely, positively, know that you can pay off the balance in full within the allotted "zero interest" time period (typically 6 or 12 months).
- The price does not change whether you accept the financing or not (if the price is lower to pay in full, the financing is not really "free").
- You have read through the offer in full—including the really fine print that requires a magnifying glass and a professional translator—so you understand what happens if for some reason you can't pay off the remaining balance after the deferment period ends. (Many times the retailer has a clause stating they can backdate your interest charges if this occurs, among other awful surprises!)
4. Putting it all on your credit card
Guilty as charged, I'm afraid. I have a couple of balances that follow me around like the Ghosts of Christmas Past, and every holiday season they seem to get a little larger and scarier.
The truth is, unless you have a zero balance on your credit card, and you’re sure you can pay off what you charge within the next billing cycle, it’s never a good idea to finance gifts using a credit card.
5. Forgetting to factor in "presents from you to you"
Time magazine calls this "self-gifting." Whatever it’s called, I do it every year. I’m joined by more than 57% of shoppers who enjoy treating themselves during the holidays. While there’s nothing wrong with this practice, what can backfire is refusing to factor in what you will spend on you when you create your holiday gift budget!
6. Using layaway as an alternative to maxxed-out credit cards
Yes, layaway is becoming an increasingly attractive alternative to credit cards for a great many holiday shoppers. But layaway—even during the holidays—is not fee-free. And, like "deferred interest" plans and other retailer-generated financing options, there is often scary fine print you don't think to read in advance (not to mention that no two layaway plans are exactly alike).
Experts say layaway should only be an option if you are sure you can meet these two conditions:
- You are absolutely, positively sure you can pay off the balance before the layaway contract expires.
- You have read through the fine print and are okay with the retailer's terms in these scenarios: a) you find a lower price somewhere else, b) you decide you don't want the item after all, c) you want to use a coupon when you put the item on layaway, d) you unexpectedly cannot pay and want to cancel your layaway, e) the item is out of stock when you go to pick it up, f) you cannot pick up your item on the date it is paid in full.