Spend but don’t throw caution to the wind this holiday season

A pinch is in the air, and the holiday season is on. You must have made lots of shopping lists for yourself and your loved ones this season. There are tons of deals on just about every product or service imaginable, and now is a good time to treat yourself after what has been a tough year for you.

While it’s important to have fun right now, it’s also important that your finances stay unscathed at the end of the holiday season. There are several ways to finance your purchases. Some popular options today are credit cards, buy now pay later, personal loans and other forms of secured loans.

Let’s take a look at a few ways you can intelligently exploit these options, have a great shopping experience, and not have burgeoning post-festival debt.

Budget, budget, budget

This cannot be stressed enough. Our desires are limitless. But our needs, like our money, are limited. Therefore, we need to set limits with our festive shopping.

We definitely want to buy things not only for ourselves but also for our friends and family. But let’s not forget the financial constraints most of us faced just a few months ago as the pandemic raged. Therefore, figure out how much you are comfortable spending on your party shopping and stay within that limit. This is especially important when purchases are made with borrowed funds.

Select the correct option

Credit cards, BNPL loans, and consumer loans are convenient financing options available to you when spending should be small to medium – say, a few thousand to a few lakhs. These loans are not too large and can be repaid easily in the short term. But if you need a much larger loan as well as a longer repayment term, you can choose a personal loan. If you prefer a lower interest rate, you can borrow against an asset such as gold.

Generally, if you are borrowing for the short term (usually less than a year), you can take out unsecured loans at a relatively higher interest rate. But for longer periods, you should consider loans with lower interest rates to reduce long-term borrowing costs.

Leverage your existing loan

Maybe you are looking to buy an expensive item, for example an expensive electronics item or even a car. These may require large loans which may have to be repaid over a period of more than one year. For example, a car loan can be repaid over seven years.

If you have an outstanding loan such as a home loan and have made your EMI payments on time, you may want to consider taking advantage of it by taking out a home loan top-up loan. This loan is tied to your home loan and may carry a much lower interest rate than an unsecured loan such as a personal loan.

A major public bank’s lowest rate on mortgage top-ups is currently comparable to its lowest auto loan rate, but lower than its personal loan rate. It’s a smart way to streamline your borrowing and lower your interest payments.

Pay attention to the use of credit

It’s easy to go over your credit card spending limit while shopping. If your spending limit turns out to be insufficient, you should contact your bank for an increase.

Normally, when the limit is reached, it is automatically increased for borrowers who repay on time. If this has not happened for you, you should talk to your bank. This is important not only to help you enjoy your shopping without interruptions, but also to keep your credit utilization rate (CUR) low. Ideally, your CUR should be less than 30 percent. This keeps your credit score from taking a hard hit.

Fully refund contributions

After budgeting, sticking to it, and borrowing smartly, you also need to repay your dues. If your loans are unsecured (credit cards, BNPL, or personal loans), be careful not to leave them on hold for too long. Unsecured credit has the highest interest rate. For example, your credit card dues could easily attract an annualized interest rate of 40-50%.

Make sure you pay them back in full and on time. Don’t let holiday borrowing slow your finances down in the non-holiday months to come.

Clear contributions before large purchases

If your party purchases are going to be big – a house, car, or something expensive – make sure your credit slate is blank.

If you have small dues such as a credit card balance, you may want to pay them off before applying for a home or car loan. This will not only improve your credit score, but will also save more of your monthly income to pay off the new loan contributions.

Your new lender would prefer you not to be struggling with older debt. A better credit rating would also ensure you get a low interest rate on the new loan.

When you borrow in any form, it’s important to keep track of the impact your loan has on your credit health. Always do a monthly credit score check, especially after a shopping trip. If your score is below 750, work on it to get it back.

The writer is CEO of BankBazaar.com

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