Hands up if you need a vacation? Okay, put your hand down, people are going to think you’re crazy if you’re putting your hands up wherever you’re reading this. I think it’s fair to say that the majority of us could use a vacation right now. Heck, quite often I need a vacation from my vacations whenever I return home.
Vacations are great, but they’re expensive. If you don’t have the money to take a trip, then you can’t go, right? Well with credit cards, anything is possible so what’s stopping you?
I’m not suggesting you charge your travels to your credit cards (seriously don’t), but I’ve often overheard people talking this way. I’ll literally hear them saying that they don’t have any spare cash now, but they’ll just charge it and make monthly payments later. I even overheard a person say that he was going to take a vacation because they have a limit of $5,000 on their credit card. Ummm, just stop. Your credit card is not a source of income or a chequing account.
Don’t get me wrong. Credit cards can be a useful tool, but they should never be used to fund your travels unless you plan on paying the full balance when your statement arrives; here’s why.
Insane interest charges
Interest charges alone should be the reason why you avoid putting your vacation on your credit cards. Do you really still want to be paying for your vacation months after you’ve returned?
Here’s the funny thing, I actually get why some people put their travels on credit. They may not have the money right away, but they’re willing to pay a small premium as they’ll have the money available in a few months’ time. It’s not the best logic, but I get it.
But here’s the thing. Have you ever calculated how much more you would pay because of interest charges? Let’s look at the following example.
Rey decides to take a trip to Japan which will cost her $3,000. She charges it to her credit card that has an annual interest rate of 19.99%. Upon returning home, she decides to only make the minimum payment each month (3% of the outstanding balance or $10, whichever is higher). It would take Rey 17 years and 9 months to pay off the balance. She would have paid $3486.72 or a total of $6490.39 for that trip.
Okay, so that’s not a realistic scenario as it’s unlikely anyone would be crazy enough to make just the minimum payments permanently, but I just wanted to show you how insane interest charges can be.
Let’s use the same above example, but this time, Rey plans to pay $250 every month. It would take her 14 months to pay off the balance and she would pay $375.27 in interest. That’s still a pretty healthy premium to pay when charging your travel to your credit card.
It all adds up
If you’re willing to put your vacation on credit, then the odds are you’re willing to charge other things to your cards too. This may seem fine in your mind, but again, those interest charges add up.
More importantly, you’re adding to your debt load. Not only will that affect the amount of interest you’re paying, but it could also hurt your credit score.
Remember, your credit utilization rate is one of the factors that determine your credit score. What that means is that your credit score could have decreased because you’re picking up debt.
In addition, have you ever thought about what will happen when you return home from your vacation? Think about it for a second. After a two-week trip seeing the sites of Japan, you’re on an emotional high. That’s until your credit card statement appears. Oh yeah, you need to pay for that trip. Where are you going to find those funds?
It takes just a few seconds to charge anything you want to your credit card, but eventually, you’ll need to pay that price. If you don’t have some kind of plan in place, you could quickly find yourself scrambling.
How to pay for your vacations
Instead of pulling out your credit cards to book the next flight deal you see, how about focusing on how you plan on paying for that vacation? Here are some ways to help you pay for your trips.
Have a vacation budget – Many of us have a budget, but have you budgeted your yearly vacations? By setting aside some money every month that’s meant for travel, you won’t need to worry about how you’ll pay for your trips since you’ll have the funds available.
Use your travel rewards points – If you use your credit cards responsibly, then you might as well reap the rewards. There are many credit cards out there that allow you to earn travel points or cash back such as the best travel credit cards in Canada. Use those points and cash earned to help offset the costs of your trip. I personally prefer the American Express Platinum card since I can transfer my membership rewards points to multiple carriers
Consider your line of credit – Let’s be clear, I’m totally against putting any type of expense on credit if you can’t pay it off the balance in full when your bill is due. That being said, if you’re the type who doesn’t mind, then use a line of credit which usually has a lower interest rate compared to credit cards.
You may think you need a vacation, but it’s never a good idea to book your trips on your credit cards if you plan on carrying a balance. Now, if you’re the type who always pays their bills on time and in full, then of course, you should charge everything to your credit cards so you can earn points.