What in the world, you ask, do credit cards, credit crunches, and risks of recession have to do with each other? Maybe more than we would like to think. We don’t have to go farther than the gas pump or even be an economist to see that things “ain’t” cheap. Gas is over $3.00 a gallon. Prices at the grocery store are up. Buying or refinancing our homes is not as easy as before. There definitely is evidence all around us that we should be more mindful of our finances. But reigning in our spending with the holidays right around the corner can be that much more challenging.

However, credit cards will play a bigger role this holiday season for many Americans. Now that it is more difficult to tap into the equity in our homes through refinancing or taking out lines of credit, more and more consumers are turning to their credit cards not only as a way to cover living expenses but also as a way to continue the great American spending spree. Unfortunately, any momentum in the use of credit cards may not bode well for consumers and their financial health. The problem is that too often we turn to credit cards as a source of money – rather than what it should be – an alternative to cash. In other words, we should be using credit cards to pay for things when we do not have cash on hand or our checkbook with us. Otherwise, we start buying things that we don’t need and really can’t afford.

It is not surprising that balances on credit cards typically balloon during the holidays. However it is troubling to know that most Americans will not pay their balances in full and will carry over larger and larger balances from one month to the next. This pattern can be very costly to each of us and devastating to our financial well being. Not only do we become more and more in debt, but also we pay much higher interest rates for the growing balances on our credit cards. You also may have noticed that the credit card offers you have received lately – whether for a new card or to transfer balances – are not as generous as they were from the past few years. Today, it is not uncommon for credit cards to have interest rates between 10% and 15%. And anyone with less than perfect credit shouldn’t be surprised if their interest rate is above 20%.

But the cost of carrying credit card debt is not just a function of the interest rate. It also is a product of how the credit card companies apply interest charges to your account. Did you know that even though your credit card discloses the APR, Annual Percentage Rate, your balances are charged interest on a daily basis? This means that you are accruing interest on interest every day causing your interest charges – and balances – to creep up that much faster. What’s more, many credit cards start charging you interest as soon as you make a purchase – even if you have paid your balance in full the previous month. Ouch. And you have to be sure not to make a late payment because the penalties are steep, it can invalidate any special offers you have, and missed payments can be reported to the credit bureaus.

So what can you do this season to avoid the credit card crunch? First, figure out how much cash you are willing and able to set aside for the holidays this year. This can help keep your spending in check and prevent you from running up your credit card balances. But if you do use the plastic this season, you have to be committed to paying the balance in full the following month. Second, take a look at your credit card’s interest rate policy or call the issuer to make sure you know what interest rate you are being charged and when the interest is applied. It can be quite a sobering experience to realize how much you really pay for your purchases when you use credit. Third, make sure you protect your credit score. If your balances go above 50% of your credit limit, it can negatively impact your credit score which makes it that much more difficult to get the best interest rates on anything from a credit card, car loan, or home mortgage. Finally, give you and your family a lasting gift by making sure that you have enough money in savings to cover several months of living expenses. If the economy is slowing and prices start to creep up, this financial safety net will be even more important.

rmal">So although ‘tis may be the season to be jolly, it doesn’t mean that your spending habits have to make you grumpy next year. Happy Holidays to you and your families.