The credit mistake holiday shoppers will make

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When the holiday spending spree kicks into gear next weekend, many shoppers will make a potentially costly mistake.

They will pay for their mall-bought gifts using either cash or a debit card.

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In fact, 35 percent of Thanksgiving Day or Black Friday shoppers say they will use cash to pay for most of gifts they buy, according to a new nationwide Bankrate survey. Twenty-eight percent will use a debit card.

Just 22 percent plan to use a credit card.

For shoppers whose credit card spending has raised red flags, using cash is absolutely the right way to go. If you already carry credit card debt, by all means stick to a budget and pay for the holidays with cash.

But for others, avoiding a credit card is the wrong choice.

“Certainly, those who are using cash or debit cards to pay for the holidays are missing out on opportunities to earn various rewards,” Maureen Powers, vice president of rewards at Discover, wrote in an emailed response to questions. “Using a credit card can provide free benefits and rewards that typically aren’t available when paying with cash or debit cards.”

These perks include return protection, extended warranty and theft and damage protection benefits.

Credit cards also offer better fraud protection.

If you swipe (or dip) your credit card at a store and a thief steals your card information, you generally will not be liable for any loss. If your debit card information gets stolen, you could be on the hook for $50 to $500 or more in losses.

Even if your bank returns all of the money stolen from your account, you’ll have to wait to be reimbursed.

Missing out on rewards

Of course, if you pay with cash or a debit card, you’ll also forfeit free money.

A recent survey by Discover found that consumers plan to spend an average of $1,159 on their holiday purchases this year. On a typical rewards credit card, that kind of spending can earn $10 to $20 in cash-back rewards.

That’s certainly not a windfall, but free money is free money.

“The spike in spending that typically occurs during the holiday season is a great opportunity for consumers to not only earn valuable rewards on everything they buy, but they can also redeem their current rewards for immediate purchases,” Powers says.

That’s how I plan to pay for Christmas this year.

Consumers appear to understand the benefits of rewards cards during the holiday season. So why don’t more shoppers use them?

Of the people who plan to use a credit card for holiday purchases, 46 percent say earning rewards is the No. 1 reason why they will pull out the plastic, according to the Discover survey.

Here are the other top reasons why people say they will use credit cards for gift purchases:

  • Convenience — 27 percent
  • Ability to track spending — 16 percent
  • Won’t have enough cash on hand — 11 percent

If this last person is you, stop right now. You may already have a debt problem that you need to address instead of making sure everyone on your holiday list is satisfied.

“There’s a reason why a lot of credit card companies offer balance transfer credit cards in January,” says Beverly Harzog, a credit expert and author of “The Debt Escape Plan.”

The reason: Too many people without enough cash on hand get in over their heads during the holidays.

A credit card trap to avoid

One credit card temptation most cardholders should avoid during the holidays: Zero percent interest promotions.

These deferred-interest programs offered through store-branded credit cards can cost you hundreds of dollars in interest charges if you don’t repay the balance before the promotion period ends.

The National Consumer Law Center has called for the abolition of these promotion plans, which it says are deceptive, confusing and come with higher-than-average annual percentage rates attached.

“Deferred interest promotions are one of the biggest credit card traps on the market today,” NCLC staff attorney Chi Chi Wu said in a press release. “No interest sounds tempting now, but you could end up in the trap of huge interest payments later.”

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Credit lines

There is perhaps no larger authority on how to improve your credit score than the CEO of the company that produces the credit score most lenders utilize to determine creditworthiness.

FICO CEO Will Lansing recently offered advice on how consumers can improve their credit score.

His take is similar to what I preach all the time. It’s better to hear it from him, though:

“The single biggest factor is not paying your bills on time. If you’re chronically late, that’s really going to hurt you. If you miss payments completely, and have to get chased for that, that’s going to hurt you. Things that used to hurt you that don’t hurt you so much anymore are things like medical bills. Our latest FICO score no longer looks at medical payments, where it used to, but credit card payment behavior is important. Whether you’ve paid your bills in the past, on time, has everything to do with whether you are going to pay them in the future on time.”

If your credit score is damaged it “can take years” to fix, Lansing says, but “it improves over time as your behavior shows responsibility over time.”

Significant digits: 58%

More than half of all consumers have maxed out a credit card at least once, according to a new survey from American Consumer Credit Counseling. Of that group, 61 percent have maxed out multiple credit cards.

At first glance, this appears to be a very high number, but then I think about all of the people I know who have been in this situation. Like me.

There was a time I wasn’t using my credit cards responsibly and I maxed them out, too.

If you’re at this stage, know you can recover, get out of debt and have a credit score in the 800s. All it takes is discipline and time.

If you need help, contact a nonprofit agency like American Consumer Credit Counseling. Or visiting the website of the National Foundation for Credit Counseling to find a certified credit counselor in your area.

FREE TOOL: Check your credit score for free today with myBankrate.

Mike Cetera

A savvy borrower always pays his debts. I'm a reporter at Bankrate, and I'll show you how.