(Guest post by Odysseas Papadimitriou)
We’re now coming down to crunch time for holiday gift buying. Whether you still have a completely unaddressed shopping list or just a few more items to pick up, you’re undoubtedly going to be making some holiday-related purchases in the days and weeks to come. Interestingly enough, that’s exactly why now is the perfect time for a bit of financial spring cleaning.
The Island Approach & The Holiday Season
You see, the winter holiday season isn’t just the busiest shopping period of the year, it’s also a time for reflection and new beginnings, especially as New Year’s approaches. A credit card strategy that helps you save on upcoming purchases while reducing the cost of existing debt and eliminating clutter from your finances is therefore perfectly appropriate for this time of year.
The strategy is known as the Island Approach (which should please those of you in need of warm imagery amidst the season’s cold). It holds that the best financial management is a product of compartmentalizing different types of transactions on different credit cards, as if they’re stranded on islands. More specifically, by using one credit card to resolve debt and an additional card or two to make everyday purchases, you’ll be able to attain unmatched product terms as well as a better perspective on your spending habits.
The Island Approach in Action
Here’s how it works. Let’s say you’re like the average household and have roughly $6,800 in credit card debt and an $800 holiday shopping budget. If you use the card that holds your existing debt to make holiday purchases, it will be difficult to assess whether or not you’re spending beyond your means and impossible to simultaneously minimize interest and maximize rewards. Credit cards tend to offer either low rates or high rewards, after all, and new purchases begin accruing interest immediately when made with a card that already has a balance.
However, you can have the best of both worlds if you transfer your existing balance to one of the many 0% cards currently on the market while using a rewards card that complements your lifestyle to handle ongoing purchases that you can pay for in full within a single billing period. Having a separate card for ongoing purchases also gives you the benefit of a built-in debt warning system, in that finance charges will signal that you’re living beyond your means since you should always be able to pay for everyday expenses in full.
The best cards for these purposes are:
- Slate for Chase (transferring debt): Offers 0% for the first 15 months and charges neither a balance transfer fee nor an annual fee.
- Blue Cash Preferred from American Express (ongoing rewards): Gives you 6% cash back at supermarkets (up to a $6,000 annual spending limit in that category), 3% at department stores and gas stations, and 1% on everything else. While it does charge a $75 annual fee, the $150 rewards bonus you get for spending $1,000 during the first three months will cover that for the first two years.
- Chase Sapphire Preferred (subsidizing holiday purchases with an initial rewards bonus): Offers a $400 statement credit if you spend $3,000 during the first three months and doesn’t charge an annual fee until the second year ($95).
A credit card calculator will show that the Slate Card could easily save you $1,000 in finance charges and fees while helping you pay down your $6,800 balance over a period of two years (the expected savings change based on your repayment period, but we used 24 months because it would be difficult to pay down that much debt within, say, the Slate Card’s 15-month intro term). Either of the rewards cards could be worth a few hundred additional bucks too, especially since the expensive holiday season could help you meet the spending requirement for the Sapphire Card’s initial bonus, which would reinvigorate your bank account a couple of months down the road. Once you get that bonus, you could close your account and open the Blue Cash Amex Card – one of the best everyday rewards cards available – to save on some of your biggest expenses.
It’s important to note that all of these cards require excellent credit for approval, which roughly 50% of consumers have. If your credit standing isn’t quite up to snuff, the best present you could give yourself is to make on-time payments every month so that you may qualify for the most lucrative offers when holiday season 2013 rolls around. If you don’t even have a credit card account on which to make timely payments, get a secured card. It will help you build credit like any other card and, in light of a security deposit that acts as your credit line, will prevent you from overspending.
Excellent credit is obviously the gift that keeps on giving, after all.
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Odysseas Papadimitriou is the founder and CEO of Card Hub, a website that helps consumers find the best credit cards for their needs, as well as Wallet Hub, a personal finance social network where you can read reviews on financial companies and professionals.