If you were counting on a holiday bonus or tax refund to pay off your holiday charges, you may not be able to. According to Hewitt Associates, 63% of companies surveyed don’t plan to give holiday bonuses this year. Due to the credit crunch, many businesses that previously offered bonuses have had to forgo them or scale them back. There’s a silver lining – many companies are switching to performance-based bonuses during the year – but that won’t help you now. To add to the burden, tax refunds may be delayed by up to seven weeks because of the late passage of the alternative minimum tax patch.
So, rather than that January or February payment you planned on making, it could have to wait until March. That means you’ll be racking up credit card interest on your holiday purchases for three months. Depending on your APR, that could total an additional $50 or more that you hadn’t budgeted for.
If you face this situation, use the first three tips to reduce the interest costs this year, and then use the second three tips to avoid interest next year.
Three Interest Rate Reduction Tips
Ask for an interest rate reduction.
If you have a good record of on-time payments, call your credit card issuer and ask them to reduce your interest rate. If you have a balance transfer offer in hand, tell them that. They may be willing to match the offer.
Do a balance transfer.
Search for a card with 0% interest and no balance transfer fees. Even if the offer is only good for six months, that should be long enough to get your refund and pay off the bills, or to cut expenses in other areas so you can pay the holiday bills. You may also receive offers from credit cards you already have. If so, then using one of those instead of adding a new card to your credit report might be a better option.
Take a loan from your emergency fund.
Normally I don’t recommend raiding your emergency fund for expenses like this, but this year, you may want to borrow the money for now and then replenish the fund when your refund comes.
Three Tips for Avoiding Interest Next Year
Change your withholding.
If you get a tax refund every year, then you’re having too much withheld from your paycheck. There’s no reason to give Uncle Sam an interest-free loan. Instead, use the withholding calculator at IRS.gov to determine how much you really need to withhold, and then file a new W-4 with your employer.
Create a Christmas account.
A few decades ago, employers and banks let people create Christmas savings accounts. Most of those have been discontinued, but you can create one on your own. The easiest way is to set up an account at an online bank. Rather than spending the increased amount you received from reducing your withholding, deposit it in the savings account. You may also wish to deposit performance-based bonuses into the account. Then you can use that money to pay cash for Christmas and holiday expenses or to pay your credit card bills as soon as you receive them.
Set a budget and stick to it.
Overspending is one of the reasons many people have to pay credit card interest on holiday expenses. Next year, set a budget for your holiday expenses, create a Christmas shopping list, and stick to it.