Now that the holiday season is over, the next season can begin — the season of actually paying for what you bought over the holidays. With overspending at an all-time high, you may find yourself owing more than you wanted to.
According to the New York Federal Reserve, Americans are now $1 trillion in credit card debt, and during the past holiday season, consumers definitely spent money to make the holidays merrier.
You might be thinking to yourself: “I just went over budget a little,” or “I overspent just this one time; what can it hurt?” Well, actually, a lot. Overspending can have quite an impact on your finances, especially if it results in carrying debt. Here are a few ways overspending can negatively impact your finances:
1. It affects your ability to save
Trying to build an emergency fund? Are you saving for a down payment on a home, or do you need to pay down debt? Overspending makes all of that more difficult. When you overspend, it reduces the amount you have to save and can delay achieving your financial goals.
Overspending can overshadow your financial goals because you cannot focus on them while paying off the amount you overspent. What’s worse, if you find yourself overspending often, not only will it be harder to reach your financial goals, but it will also take you longer.
2. It leads to carrying and growing debt
Getting out of debt is a constant goal for many. New Year? Get your money right! Get out of debt now! Here are four ways to become debt-free! It’s constant, but debt does not come out of nowhere. Debt is accumulated over time — and it grows. It’s important to understand why and how you accumulate debt and what specifically leads to overspending.
With inflation and everyday essentials being more expensive, it may be harder to make ends meet, but that requires adjusting your budget and finding areas where you can cut expenses. Don’t start overspending and carrying debt to manage the cost of everyday living — do an honest audit of those “essentials.”
3. It can affect your credit score
This is a big one. Credit utilization makes up a part of your credit score, and your credit score is reviewed for almost every major expenditure, including mortgage approvals, apartment rentals, auto insurance, etc. If you are overspending and carrying a balance, it means your utilization may be high, which will negatively impact your credit score.
For example, if you have a credit card with a limit of $3,000 and spent $2,500 during the holiday season but are able to pay it off when the bill comes or before, your utilization will be 0% on that card — which will look great on your credit report.
But if you spent the $2,500 and can only make a $500 payment, that leaves you with a $2,000 balance plus the interest that will be applied. That means you are now carrying a balance very near your credit limit, resulting in high utilization, high interest, and a generally bad look on your credit report. In fact, it will likely knock your score down several points.
To a potential creditor, it looks like you rely on credit to live and cannot pay your bills. Remember: credit is not an extension of your income.
The ideal use of a credit card is that you use it and then are able to pay it off in full every month. If you find you cannot do that, then you are overspending, carrying debt from month to month, and negatively impacting your credit score.
Sit down with your bills and expenses and see where you can cut out or reduce spending. You’ve heard about “Dry January”; maybe you’re even practicing it. Why not make the remainder of the month a “No-Spend January” and put your resources into paying off the debt and restructuring your budget? Commit to sticking to your budget so that you can stop overspending. Trust, it’ll pay off in the long run.
Jennifer Streaks is Senior Personal Finance Reporter and spokesperson at Business Insider and a financial contributor at theGrio. A nationally recognized expert on money and affordable lifestyle living, Jennifer is an established financial columnist who has been featured on CNBC, Forbes, ABC, MSNBC, CBS, and more.
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