Back in 2014, I got a huge shock. It was my first Christmas after graduating from college and I was paying for gifts with my big-girl paycheck.
But wow. I wasn’t prepared for how expensive it was! Even with a modest $30 gift limit per family member, I was in the hole hundreds of dollars. I slapped the purchases on a credit card, unsure of what other options I had.
After a few years of this song and dance, my husband and I got sick of it. We were tired of paying an exorbitant credit card bill every January. Who wants to ring in the New Year with debt breathing down your neck?
It took some trial and error, but we finally found a way to pay for holiday gifts “for free.” Yeah, you read that right. Here’s the 5-step process I use to fund Christmas gifts every year—so we start the New Year debt-free.
1 – Be in a financially-healthy place first
My method is simple enough: get a cashback credit card, buy stuff with it, pay off the card every month to avoid interest, and use the rewards once a year for presents.
But not everyone can afford to do this method. If you’re struggling with heavy credit card or student loan debt right now, I wouldn’t encourage you to take out more debt to pay for the holidays.
However, if you feel confident that you can pay off your debts every month without paying interest, this process is for you!
2 – Sign up for a cashback rewards credit card
Once you feel that you’re in a safe place to use debt as a tool (instead of a prison guard), sign up for a cashback rewards credit card.
I use the USAA Limitless Cashback Rewards card to earn 2.5% cashback on everything. However, I guess USAA didn’t make a lot of money on this deal, because it’s not available for new signups.
If you don’t already have a cashback rewards credit card, here are a few popular, reputable options.
Now, this is a credit card, so it’s not a decision to take lightly. Always remember things like:
- The fine print. USAA requires me to meet their direct deposit rules to qualify for my rewards. Always read the fine print and make sure you can meet the bank’s requirements every month.
- Paying off the card every month: Never, ever accrue interest on your rewards card. More often than not, the interest outweighs the rewards (and your bank is betting on that!). So before taking out a credit card, ask yourself: How easy is it to pay off the card every month? Do they penalize you or make it hard to pay off the entire balance?
- Reward categories: Some cashback cards require you to sign up for specific rewards categories. I use my Bank of America business card to earn rewards for “Online Services,” for example. Make sure you regularly shop in your desired category so you can earn rewards. Oh, and mark your calendar if your reward program requires you to sign up again for your rewards categories. They love doing sneaky stuff like that.
- Other credit card perks: Hey, if you’re tiptoeing the dangerous cliffside that is reward credit cards, you might as well know all of your perks. USAA covers the theft or loss of anything I buy on my card, as well as some nice fraud prevention features.
3 – Buy everything with the credit card
This is controversial in the realm of personal finance, but I buy almost everything with a credit card. From groceries to home repairs to my glut of Amazon purchases, everything is covered on the credit card.
When I put as many charges as possible on my card and pay them off, USAA rewards me with cashback at the end of the month. So, if I spend more, I earn more. As long as I’m buying things I would have bought with my debit card anyway, it’s a good deal for me.
4 – Pay off the credit card every month
This is the most important step in this process. You only earn cashback rewards when you pay off the balance on your card. So if you just keep racking up debt and don’t pay it off, you not only have to pay interest, but you also aren’t earning rewards.
Banks like rewards cards because they’re encouraging you to bulk up your debt. They’re betting on you not paying off that card every month. One little slip is all it takes for them to squeeze more interest out of you. Don’t let the bank win: always, always, always pay off your credit card before it accrues any interest.
If you want to use credit card rewards but don’t think you can pay the entire balance each month, you don’t have to put all of your expenses on the card.
Buy $100 worth of groceries once a month with the card and earn rewards that way. It doesn’t have to be all-or-nothing, especially if it puts you at risk of credit card interest payments.
5 – Cash in the rewards in November
Paying off the card is the scary part, but the fun stuff comes in November! Every year, we cash in our cashback rewards to pay for gifts. I like to do this in late November so we can shop in early December.
In a good year, we earn $1,000 in credit card rewards since we put nearly all of our expenses on the credit card.
We take the total cash award amount and divide it by the number of family members we’re gifting that year. So, if I give gifts to 10 family members and have $1,000 in cashback rewards, I have a generous $100 limit per person for Christmas that year.
The key is to stick with your per-person budget. Otherwise, you’ll be spending “real money” and not your “rewards money.”
P.S. Remember to factor in shipping costs if you mail presents to your family! You might need to adjust the budget to $70 for the gift and $30 to actually mail it.
The bottom line
The holidays used to rake my finances across the coals. Instead of enjoying a little holiday cheer, I worried way too much about money. But paying for everything with a cashback card has made the holidays fun again!
This is definitely not a process I could have done in the beginning of my debt-free journey, though. Focus on getting out of debt before you dive into the dangerous but rewarding world of cashback credit cards.
Contributor’s opinions are their own. Always do your own due diligence before investing.