11 Things You Can Do Now to Avoid Holiday Debt

Happy couple in the shopping center

If you were aghast at how much you spent on holiday gifts when the credit card bills arrived last January, now is the time to start thinking about how to avoid a repeat performance. Even though it may feel shockingly early to begin thinking about the holidays, starting now will give you plenty of time to plan, budget, and build a shopping fund so after New Year’s, you’ll hardly have a bill to pay. Below, financial experts share their favorite tips for emerging from the holidays virtually debt-free.

1. Look Back

It’s an ideal time to set a budget for your holiday shopping, but where to begin? Roshni Chowdhry, innovation and product development lead at SafetyNet, recommends looking at your past spending history. “We have a tendency to underestimate how much we will spend on gifts each holiday season,” she says. “Make a list of what you bought last year and note what was necessary and what wasn’t—then eliminate the latter. This will give you a realistic measure of how much you should plan to spend.” 

2. Make a Gift List

Making a list of whom you need to buy for and how much you plan to spend per person is an effective way to stay organized. Justin Lavelle, chief communications officer for background-check service BeenVerified, says, “You can save yourself a lot by shopping from a list. This can prevent impulse buying, and thus, limit overspending.”

Before you finalize the list, Catey Hill, author of The 30-Minute Money Plan for Moms: How to Maximize Your Family Budget in Minimal Time, recommends asking yourself if you’re giving gifts to people you’re no longer connected to. “For people you don’t chat a lot with during the year, consider sending a card rather than a physical gift,” she says.

3. Change It Up

If you can’t get to a comfortable budget with your current list of recipients, Jerry Patterson, senior vice president of retirement at Principal Financial Group, suggests that holding a family gift exchange or white elephant party—instead of buying many individual gifts—can be a fun way for everyone to celebrate and save money. “Set a spending limit that everyone is comfortable with to keep things fair and affordable,” he suggests. 

4. Build a Holiday Fund

Chowdhry advocates for having a specific fund for holiday shopping rather than drawing from any savings you already have. “Withdraw whatever you can afford to stash away each payday, whether it’s $20 or $200,” she advises. “When it comes time to do your shopping, use your saved cash first so you know exactly what you’re spending and can avoid pulling from your more important savings account.” 

5. Turn Pennies into Presents

Patterson suggests saving even more money by saving all your spare change. He says, “At the end of each day, make an effort to throw your extra cash and spare change into a jar. If you start now and commit to regularly adding to the pot, these small contributions can add up before the holiday shopping season begins.”

6. Eliminate Excess Spending

Consumer savings expert Andrea Woroch likes to save by cutting back on extras for a few months. “Review your spending over the past several months and identify areas where you can cut back,” she says. “Whether it’s weekly takeout, weekend spa appointments, or too many morning lattes, there is always room in your budget to cut back and boost your holiday savings.”

She suggests putting that money into a savings program at your bank or local credit union or using a site like SmartyPig.com, a free service that helps you stash cash for any purpose.

7. Play It Smart with Credit Cards

While you’re shopping, Steve Hasbrooke, the VP controller at Mission Federal Credit Union, recommends limiting your spending to one credit card, preferably the card with the lowest interest rate. “This will save you money by paying less interest while you pay off your holiday purchases,” he says.

And try to avoid the lure of opening a new store credit card while you’re out shopping. According to Dana Vas Nunes, senior manager of deposit products at Alliant Credit Union, “Retailers are incentivized to push them during the holiday season, and they often offer perks like a 15% discount if you open a card that day. But that discount can actually come at a steep cost. Most store cards have higher fees/costs than traditional credit card providers; it’s how they offset the discounts.” If you do decide to open a new card, do your research ahead of time and consider one of these recommended store credit cards. 

8. Reap the Rewards

Speaking of credit cards, remember to let your credit cards work for you. Woroch suggests that between social events, back-to-school shopping, and family getaways, you likely racked up quite a few points on your credit card over the summer. “Use those points to offset your holiday spending by turning them into gift cards,” she says. “You can give these cards as gifts or use them to pay for gifts.” 

9. Get Started Now

Giving yourself a few months to shop for holiday gifts allows plenty of time to find the perfect present and the best prices. Hasbrooke says, “If you’re like me, you have probably found yourself scrambling for a last-minute gift. This often leads to spontaneous purchases of items that may not be exactly what you would have chosen if you had more time to consider the purchase. It can also lead to spending more on that item than you budgeted for.”

10. Consider Layaway

Lavelle suggests that layaway can be a helpful tool to spread your spending out over a few months. He explains, “It is a concept from the past, but many stores are bringing it back, especially for toys and household items. The store will keep the item and allow you to make small payments toward the purchase price until you have it paid off.” 

11. Get Creative

Save money on holiday gifts by making some of them yourself, which is something that Certified Financial Consultant Jim Szakacs of Phoenixville, Pennsylvania, recommends. “Consider giving gifts that you’ve made with your own two hands,” he says. “Nothing communicates more personally during the holidays than opening a gift that you know someone has spent time not only thinking about, but actually making for you.”

By following these tips now, you can avoid the shock of those post-holiday bills a few months down the road. Plan ahead to make sure you can enjoy your holidays without financial stress.

Image: Martin Dimitrov

The post 11 Things You Can Do Now to Avoid Holiday Debt appeared first on Credit.com.

1 in 4 Americans Plan on Racking Up Holiday Debt in 2016, Survey Shows

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In a new survey of 1,147 American adults conducted by MagnifyMoney, more than one in four (26%) Americans said they plan to rack up holiday debt during the 2016 holiday season that will linger more than a month. Among the 26% who will rack up debt, 66% expect they will take three months or more to pay off the debt.

Holiday debt can quickly spiral out of control. MagnifyMoney found the average shopper surveyed who added debt during the 2015 holiday season racked up $1,073.

Using a credit card with average APR of 16% and making monthly minimum payments of around $25, it would take that person more than five years (61 months) to get out of debt, according to MagnifyMoney’s Credit Card Payoff Calculator. Over that time, he or she would pay an additional $496 worth of interest charges.

Nearly one-third (32%) of this year’s survey respondents said they incurred holiday debt during the 2015 shopping season. People who took on holiday debt in the past are much more likely to take on debt this year because they can’t afford to pay cash, our survey found, with 74% saying they will incur debt this year. They are also more likely to feel financially stressed.

Among those respondents who incurred credit debt during the holidays in 2015 , the average shopper added $1,073 of holiday debt. And a staggering 74% said they will likely take on more credit debt again this year.

More debt = more financial stress

More than half (59%) of respondents who took on debt over the holidays in 2015 said they accumulated $500 or more of debt. Among people who said they racked up $500 or more in holiday debt in 2015, MagnifyMoney found greater trends of financial stress and a greater likelihood of incurring additional debt in 2016.

 

Check out our full survey findings below or download a fact sheet here.

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Here are 5 ways to avoid holiday debt traps:

1. Steer clear of store credit cards

The holidays are prime time for retailers selling store credit cards to customers. Customers are often wooed by promises of upfront discounts on purchases, helping them save on their holiday shopping in the short term. But store credit cards notoriously have some of the highest interest rates on the market — an average APR of 23.84% versus 16.28% for regular credit cards. People with poor credit may be saddled with store cards with interest rates as high as 27%.

Store credit cards can also come with onerous deferred interest fees — they may offer no-interest promotions for a certain amount of time. But if you fail to pay off the entire balance by that date, you can be slapped with the entire interest balance in one lump sum.

If you want to get a discount on your purchases and signing up for a store credit card is the only way to get there, just be sure you have enough cash on hand to pay your bill right away. With most discounts only 10% to 20% off, you’ll actually wind up losing whatever you saved if you get slapped with a 20% or higher interest rate later.

2. Make a budget and stick to it

The downfall of most holiday shoppers is that it is incredibly easy to get swept up into the excitement of shopping. Before you know it, your budget is blown, and it isn’t until after the giddiness of the holidays winds down that you realize the extent of the damage. Avoid the holiday debt hangover by creating a budget early and sticking to it no matter what.

3. Exchange ‘Secret Santa’ gifts with family and friends

Secret Santa is a fun and smart way to drastically reduce your holiday gift-giving budget. Ask your siblings or friends to draw names from a hat rather than buying gifts for everyone individually. You can all agree on a price limit so no one feels like they over- or underspent.

Can’t draw names in person? Try a Secret Santa online tool like Secret Santa Generator or DrawNames.com.

4. Get rid of last year’s holiday debt first

The average shopper racked up $1,073 worth of credit card debt last year, our survey found. If you have credit debt left over from last year’s shopping, don’t pile on more debt and continue to let interest accrue. Consider signing up for a 0% APR credit card and making a balance transfer (check out the best ones of the year right here). You’ll buy yourself additional time to pay off last year’s debt, and you’ll improve your credit score in the process.

5. Start saving for next year’s holiday shopping today

If you felt unprepared for holiday shopping this year, it might be because you didn’t have enough time to save up. Going into next year, open a savings account and label it “Holiday Shopping.” Then estimate how much you’ll need to save — $500? $1,000? Divide that number by 10 and set up a direct deposit from your paycheck into that savings account for that amount. For example, if your goal is to save $1,000, you’d need to contribute at least $100 per month for 10 months to reach that goal.

Why only 10 months? That way you can start shopping a bit earlier than December, giving you plenty of time to find the perfect gifts for your loved ones.

The post 1 in 4 Americans Plan on Racking Up Holiday Debt in 2016, Survey Shows appeared first on MagnifyMoney.