How to Avoid What Dave Ramsey Calls the $483 Christmas Mistake

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  • Many consumers rack up debt during the holidays.
  • Doing so might cost a lot more money than you'd think, thanks to higher interest rates on credit cards.

It could really pay to heed his advice.

Have you ever been in this situation during the holidays? You're trying to stick to a spending budget but holiday sales keep calling your name. And you also really want to get the most important people in your life gifts they'll really enjoy -- even if it means having to rack up a small credit card balance and carry it forward.

It's not at all uncommon to close out the holiday season with some amount of credit card debt. But financial guru Dave Ramsey warns that that could end up being a very expensive mistake.

Are you willing to lose lots of money to interest?

In a recent blog post, Ramsey explained how some innocent holiday purchases could really add up to a large amount of interest. First, Ramsey cited a survey by the National Retail Federation, which found that consumers plan to spend $998 on holiday purchases this year.

He then gave an example of someone charging that $998 on a credit card in the absence of having the money in cash or a savings account to pay for those purchases outright. Assuming an interest rate of 17% and only making a $25 minimum payment, it would take that consumer five years to pay off their balance. And after accruing interest, that balance would come to $1,481.55. That's $483 more than the initial $998 balance racked up. Ouch.

Now clearly, this is just one example. You might rack up some holiday credit card debt that doesn't cost you nearly as much as $483 in interest. Or, you might rack up a larger balance at a higher interest rate and get stuck losing $850 after all is said and done.

The point, either way, is that accumulating holiday debt and carrying a credit card balance forward can be costly. And so you're really better off avoiding landing in that boat.

How to avoid holiday debt

If you don't like the idea of throwing money out on credit card interest, then the solution is simple. Only charge expenses on a credit card you can afford to pay off when your bill comes due. And to figure that out, comb through your savings and checking accounts to determine your holiday spending limit. That limit might be $500, $1,000, or a different amount. But that amount should be a sum that allows you to avoid debt entirely.

Now to be clear, this isn't to say you shouldn't use a credit card for your holiday purchases (though Ramsey might advise you to pay for purchases in cash and leave your card at home). Swiping a card could mean getting to rack up reward points and earn cash back on the things you buy for the holidays.

The point, rather, is to avoid charging expenses you can't pay for in full that same month -- even if they're relatively small. Credit card debt has a way of spiraling, and if yours gets out of hand, it could cost you a lot of money in interest. That's a fate you're better off avoiding.

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