Many people start their holiday shopping by using their debit cards quite heavily, but then switch to their credit cards. While there are good reasons for using a credit card rather than a debit card over this period, there are also some very bad reasons as well.
Debit cards and credit cards are seen by many people as almost interchangeable. They look alike and they are used at the same sorts of places. Where a credit card is accepted, a debit card will also usually be accepted. But although they may be similar in the way they’re used, their structure is actually quite different.
A debit card directly accesses a bank account of some kind, often a transaction account but it could be a savings account or a flexible home loan. A credit card on the other hand has a separate account, which charges interest to the credit card holder on the balance incurred. In other words, there tends to be more money available on a credit card account, but the money is more expensive to borrow.
One reason why some people use credit cards more intensively during the Christmas season is that they earn rewards by doing so. If the shopper uses their credit card throughout the year for the rewards, then it makes sense to do the same over Christmas. However, very few credit cards offer extended rewards during the Christmas period or the holiday run-up, although some card holders believe this is the case.
There are some one-off purchases made with credit cards to take advantage of the interest free grace period. These may not be Christmas presents but for example end of year renewals, such as professional subscriptions or travel or sports season tickets. This can actually make sense, particularly if it avoids overdraft penalties.
But the big issue is that some people simply don’t have enough money during this time and so are forced to rely on credit cards. This can make some sense, for example, they may simply extend the spending over a couple of months, but there are two dangers. The first is that the balance may remain high on the credit card for a long period and so attract interest. The second is that it may mask just how much is being spent by spreading the amount over a length of time.