20
Oct

debt for vacation

According to a 2015 Experian study, about 46 percent of consumer respondents said they had to finance a vacation with credit cards because they hadn’t saved enough ahead of time to cover the full cost of the trip.

If you are one of the many people who charges vacations to a credit card and worries about paying them off later, you may want to reconsider. The financial risk you could be courting has implications both for your bank balance and payment capabilities, and could leave you stuck having to fix your credit.

First, let’s talk about the interest charges.

Interest charges

Vacations tend to be large expenses, even when conducted on a budget. So throwing the entire cost of your trip onto a credit card means that if you don’t pay it off in full before the next billing cycle, you will be charged interest. Even though making steady payments over time will gradually chip away at the balance of the trip cost, you’ll still be paying high amounts of interest over and above it.

The national average interest rate charged by credit card companies hovered around 15 percent in March of this year. So let’s assume the annual percentage rate (APR) on your card is also 15 percent. That means if you charge $5,000 to your card for a vacation, and it takes you seven months to pay it off, you will be paying an additional $231 in interest — even more if it takes you longer to pay it off.

Additionally, most credit cards don’t have a fixed APR these days, but instead offer a variable APR, meaning it can change over time, sometimes with very little warning. For example, credit card interest rates can suddenly rise due to changes in the federal funds rate, as happened earlier this year. So, no matter how you look at it, the interest you accrue on a credit-paid vacation is no small concern.

Another consideration is the amount of debt you already have.

Existing debt

If you are carrying a significant balance on your credit card and you add a vacation expense to it, your credit utilization ratio will increase. This means your debt is more closely approaching the total credit available to you and it can have an adverse impact on your credit score. The more your score takes a hit, the more likely it is you could run into trouble when applying for new credit or a loan down the road. Not to mention, the more debt you have, the harder it is to pay off, putting a cramp in your lifestyle and affecting your ability to pay for recurring bills.

So how can you better finance your vacation?

What’s the best alternative for paying for your vacation?

The best answer is to avoid financing at all and to save as much as you can upfront. There are myriad ways to save for a vacation that fit into your everyday life, including:

  • Temporarily cutting out or downgrading things like fitness classes, massages, streaming media services, or going to the movies, to name a few
  • Reserving your tax refund for travel, instead of blowing it on products or services you’ll soon forget about
  • Having a garage sale to earn cash from all the things you no longer want or use

If credit issues are making it harder for you save for those purchases that really matter, like a family vacation, CreditRepair.com can help repair your credit score.

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