Holiday spending and credit cards go hand in hand, and that’s a problem.
In 2019, 1 in 4 Americans plan on going into debt this holiday season. In fact, holiday credit card spending is up year over year for the last decade. Some for a small amount, others for much larger. The point is, consumers are struggling to make ends meet and when the holidays come around, few are prepared financially. Nearly 80% of us are living paycheck to paycheck, leaving little money to save towards holidays or other financial needs.
The holidays arrive, and we’re faced with a large influx of expenses. These expenses aren’t likely factored into your budget, if you have one. We spend for the holidays and sacrifice our normal bills to cover the costs. Or, like the 1 in 4 mentioned above, we choose to shop on credit cards and take these charges on as high-interest debt.
Following the holidays, we’re faced with one of two scenarios. Try to “catch up” with the bills you missed during the season. Or, start paying down the credit card balance.
The holidays are gone, but the bills are here.
Once the holidays pass, reality begins to set in. Catching up on bills is a difficult scenario to be in. With little room in the budget, there simply isn’t enough “extra” money to go around. You can borrow from a different part of your budget, but that’s not solving the problem, rather relocating it. Once you’re at this point, it’s very difficult to dig yourself out without an influx of income.
This exercise of shifting money to cover bills only lasts so long. Eventually, one or more of your bills will get behind while you try to manage this new expense.
The same is true if you decide to put your holiday shopping on credit cards, or even a personal loan. The end result is often the same. If you drive up your card balances, you face high-interest, damage to your credit, and higher monthly payments. Not to mention, with interest you’ll end up paying far more than what you actually spent.
Why do we overspend during the holidays?
There’s a couple reasons we tend to overspend. And many more that we won’t cover in this article. Many Americans live above their means, and holiday spending is a great example of this. A big piece of holiday credit card overspending is the need to “keep up with the Joneses” or appear financially stable to friends and family members. While our spending may be generous, it’s also damaging to our personal finances. No one wants to appear to be struggling when it comes to the holidays. It’s a time for giving, and consumers want to participate, whether their budget allows it or not.
The second most common reason consumers overspend is because they don’t have a budget. Without a budget in place, we are essentially keeping a running tally of ALL of our finances in our heads. With the amount of transactions most people execute, this is a surefire way to have a skewed vision of what you can safely spend. Of course, having a budget is only the first step. You have to stick to the budget.
Budgeting for the holidays isn’t just for practice.
That’s right, the amount of money you budget for holiday shopping shouldn’t be a “maybe” amount. It should be a definitive limit to the money you’re going to spend in total. This is generally done well before the holidays so you can start setting aside a small amount towards this budget in preparation.
Once the holidays are upon us (or at least the shopping) it’s imperative that you work within the budget for your spending. This means you may not be able to give lavish gifts this year, especially if your budget is small. Friends and family members are not likely to “want” you to go into debt for them.
Credit card interest is the gift that keeps on giving… forever.
For those that will do most or all of your shopping on credit cards this year, you’ll be facing high interest rates and minimum payments very shortly after. For example, let’s say you’ve spent $1500 on all your shopping expenses, all on a credit card with an average 18% interest rate. Paying a minimum payment every month of $45, you’ll be paying off this debt for 4 years, and will have paid an additional $600 in interest charges. It’s quite common for consumers to be paying past years holiday expenses while shopping for the current one.
In this case, credit card rewards may be the right choice.
We don’t traditionally recommended holiday credit card rewards. They are essentially a trap to lure consumers in with low introductory rates, followed by exorbitant costs. However, when it comes to the holidays, there can be some good reward programs to take advantage of.
These rewards can be very useful to give you an interest free hand in completing your shopping. The trick, like with any rewards card, is to fully understand the scope of the program, and ensure you’re paid off before it ends.
What can we do to avoid overspending during the holidays?
We’ve already discussed a budget, and that should be your first step towards curbing excess spending. Ideally, you don’t want to max out your credit cards. This can generate fees, and also dramatically increase your credit utilization, a big factor in your credit score. When building your budget, you should try to keep your credit card spending limit at or under 50% of your available balance.
Another way to keep costs down during the holidays is to shop throughout the year. Holiday shopping doesn’t have to be done during the actual holidays. Often times prices are higher at this time. If you can do some of your shopping throughout the year, you stand to save a good deal when the holidays arrive. In addition, you’re spreading out the money you’re spending throughout the year, rather than all at once.
Lastly, consider a combination of cash and credit during your shopping. Work into your budget a max amount you’re comfortable spending on a credit card. Then determine how much cash you can save for the holiday. This combined amount is your holiday budget. Because you’ve paid for some of your shopping with cash, you don’t have to worry about interest being added to that portion.
Shop safely, and shop smart.
In 2019 there are many options for shoppers. We have more access to competing prices, quality and supply than we ever have before. It’s more important than ever to “shop around” top find the best price, or terms for your purchase. There’s no shame in walking out of a store because you know you can get a better deal elsewhere.
Always be cautious when shopping online, and be sure you’re buying from a reputable website. Identity theft and fraud are very popular during the holidays, and working with online stores with solidified reputations is the safest way to shop online. During the holidays, it’s a good idea to check your statements regularly. Ensure no unknown charges are showing up, and also make sure your own charges are correct. Remember, most credit card companies aren’t looking for their own mistakes. It’s up to us as consumers to stay on top of our own finances, and that includes credit cards.
Recovering from the holiday credit card blues.
While it may seem obvious, paying down your holiday credit card balances should be priority number one. This is especially true if you took advantage of a credit card reward that may soon expire. The problem most of us face is, we didn’t have the extra money before the holidays, so it’s unlikely we’ll have it afterwards either. We’re now stuck in the same position, but with more high-interest debt.
This is again why a budget is the most important first step. Your budget will dictate what you can and cant handle when it comes to additional debt. If used correctly, you can eliminate the possibility of debt completely by sticking to this budget. Avoid trading debt for debt whenever possible. A lower interest credit card, a consolidation loan, or a balance transfer are all examples of paying debt with debt.
For those who are struggling with debt, and want to get started on a path to financial freedom, contact us. Our licensed consultants are available whenever is most convenient for you.
Your partner in debt relief,
Consumer First Financial