When Brian Brandow started financing family vacations with credit cards, he didn’t measure the cost of trips against a bank account balance. Instead, he focused on credit limits.
“In our mind, as long as we had the available credit, we never really thought of the back end of it — you know, what it may mean for our minimum payment, or the overall increase to our debt,” says Brandow, who writes about his family’s journey getting out of debt on the blog Debt Discipline. Brandow has since paid down that credit card debt and now saves for family trips in advance. But for years, those credit card-financed vacations pushed the family’s card balances higher and added stress after they returned.
Charging a vacation you haven’t budgeted for is hardly an uncommon practice. About 46% of consumers surveyed said they had paid for a vacation by credit card when they didn’t have enough saved, according to a 2015 study from Experian. If you’re among these vacationers, you might want to reconsider your plans.
Big interest charges
You can generally pay for your vacation by credit card without incurring a penny of interest, if you pay it in full by the end of the billing cycle. But when you don’t have the savings to do that, you could end up paying a premium for your trip in the form of interest charges.
Unless you have an active 0% APR offer, there’s a good chance your credit card comes with an annual interest rate in the double-digits. In the first quarter of 2017, the average annual percentage rate on credit cards that were assessed interest was 13.86%, according to Federal Reserve data. Airline and travel credit cards tend to carry even higher APRs.
With that interest rate, paying down a $5,000 vacation in a year would tack on an extra $383, assuming equal payments. The longer you take, the higher those charges get. You’d rack up more than $1,950 in interest charges if you paid down the balance in five years, for example — easily enough to get you a plane ticket to London and back.
When you’re already carrying debt, adding vacation costs could make already high balances bump up against your limit. Over time, that could sink your credit score.
The percentage of available credit used on a credit card has a major impact on your FICO score. VantageScore also calls the percentage of available credit used a “highly influential factor.” With a falling score, qualifying for favorable credit terms also becomes challenging. Getting a 0% APR card and paying down the debt interest-free might be a no-go.
Burgeoning balances could also make it harder to keep up with minimum payments. Falling behind on payments could cause your issuer to increase your APR, slash your limit or shutter your account. That could leave you with fewer financial options when unexpected expenses arise, such as emergency car repairs or big medical bills.
Facing your debt can be nerve-racking — especially right after coming back from vacation. For Brandow, this was one of the worst parts about financing a trip with credit cards.
“Your next credit card statement really reflected the damage that was done after this great family vacation,” he says.
These days, Brandow and his family save up for trips, making the time away more enjoyable, he says. He compares a Disneyland vacation he took with his wife and teenage kids, which they had saved up for, with a financed trip to the amusement park they took 13 years ago.
“On both vacations, we enjoyed ourselves,” he says. “But coming back from the second trip we took recently was much more enjoyable because we didn’t have a large amount of debt hanging over our head post-vacation.”
What to do instead
Before you take a vacation you can’t afford, you might want to re-evaluate your options to avoid that debt hangover:
Downsize. Canceling expensive plans in favor of something more budget-friendly may sound drastic, but it could be a smart move if it helps you avoid unnecessary debt and stress. Ask if you can get a refund on your airfare or hotel stays without paying cancellation fees.
Save up. If you have a dream vacation in mind, start setting aside money now. By saving consistently, you’ll eventually be able to pay for that trip without going into debt.
Stay local. While paying down debt, Brandow and his family kept spending down by vacationing locally and taking day trips near home.
“We realized we could still have a great time as a family, but we didn’t need to get on a plane and go somewhere, or stay in a hotel and have this big travel expense,” Brandow says.
This article was written by NerdWallet and was originally published by Forbes.