How to Avoid Debt This Holiday Season

The holiday season may be “the most wonderful time of the year,” but that can change fast if you end up with a huge pile of debt once the fun is over. On the other hand, if you’re a credit card company, it’s even more wonderful. Americans plan to spend an average of $1,014 on gifts this holiday season. Meanwhile, consumer credit card debt is a record $1.17 trillion, with delinquencies at an all-time high.

There’s nothing wrong with having a wonderful holiday season, including taking care of everyone on your gift list. But for it to be truly wonderful, enjoy the season while also giving yourself the gift of not being buried in debt and bills.

How to Avoid Holiday Debt

The easiest way to avoid holiday debt is to put away the credit cards and pay with cash. We all know that’s easier said than done, though, particularly when so much buying is done online. Estimates are that consumers plan to do about 38% of their shopping online, and 85.1% of consumers expect to use credit cards when shopping this holiday season.

If you were to run up a $1,014 balance (the average expected gift spending amount) on a credit card with a 24% APR and make a $50 a month payment, which is likely more than what the minimum payment would be, you wouldn’t finish paying off this year’s holiday bills until 27 months after the holidays ended. You’d also add $310.32 in interest to that balance. That’s, of course, if the card had no balance when you started. If the balance is higher, or the APR is higher, the amount you’ll spend increases very fast, and the time it takes to pay it off gets much longer.

To give yourself a heads-up, take a look at the part of your credit card statement where it says how long and how much you’ll pay if you make minimum payments on the balance you carry now. Adding $1,014 – or any amount – to that is just going to make it worse.

Vow this year to end the holiday tradition of giving yourself the gift of debt and the credit card companies the gift of your hard-earned money.

Stick to a List and Budget

Take these steps to create a holiday budget that will keep you out of debt:

1. Create a holiday spending budget that includes your income for the holiday spending period, how much you must pay for bills and other monthly expenses. What’s left over is what you can spend on gifts, decorating, food and entertaining.
2. Figure out how much of the holiday spending money you have available that will be spent on each category – gifts, decorating, entertaining. Be as specific as possible.
3. Plan your shopping by making a list of everyone you plan to give a gift to and how much you will spend on each individual, according to what you have available in your budget.
4. If you don’t have enough money in the budget to cover your gift list, find ways to cut down on decorating and entertaining.
5. Stick to what you’ve budgeted.

Use Cash

Withdraw the cash you need to meet your spending limits and leave the credit cards behind when you walk out the door. Use the envelopes method to keep track of everything – label envelopes with the names of the people you’re buying gifts for, as well as for groceries, wrapping paper, and other items on your holiday spending list.

Use the money in the envelope, and nothing else, for the person or expense that’s written on it.

You can even do this for online shopping. Open a second checking account at your bank (you can do this online in minutes at most banks if you already have an account). Put your holiday spending money in that account. Use the account – not your credit cards or another account – when buying online.

You can also use it for physical purchases if you don’t want to carry cash if the bank issues you a second debit card specific to that account. If you can use your main debit card for your general account as well as the holiday spending account, make sure to keep careful track of your holiday spending so you don’t dip into your grocery or bills money.

The only drawback is that debit cards aren’t as protected online as credit cards are, so be sure you’re buying the item you intended to from a legitimate seller on a legitimate site.

Plan for the Unexpected with Gift Cards

Buy “vanilla” gift cards – the kind issued by a card company like Visa that can be used anywhere – so you’ll have low-cost generic gifts on hand for unexpected giving commitments (your sister brings her new boyfriend to the family celebration, for instance). Gift cards, particularly those that aren’t specific to a store or business, are a cost-effective way to fill the unexpected gift gap. If you don’t need them as gifts, you can use them yourself to buy gifts, pay for your groceries, gas or some other necessity.

Put All Your Purchases on One Card

This helps you keep track of how much you’re spending. If you have more than one credit card, use the one with the lowest APR. After the holidays, transfer the balance to a 0% interest card and pay it off before the temporary promotional period ends.

Buy Local

Shop Local Saturday, also known as Small Business Saturday, is the day after Black Friday, and extends to Sunday in many areas. Local businesses offer discounts and promotions that can help you check gifts off of your list for less than you’d normally spend. Some downtown groups and Chambers of Commerce host special events that can also lead to savings. Only 20% of consumers this year plan to take advantage of Shop Local Saturday. Check it out – you not only save money, but you also support your local economy.

Shop Alone

It’s hard to stick to that budget battle plan if you’re hearing, “Ooh, let’s go check out the jewelry sale,” or, “Oh, come on! A budget is no fun! I’m not sticking to any boring budget!”

Going it alone keeps you focused on the primary mission, which is to buy gifts you won’t still be paying for years after you bought them. You also may avoid an expensive meal or drinks bill. If you and a friend or family member traditionally shop together, and you aren’t confident you can stay the course, replace the shopping tradition with another fun, inexpensive holiday activity.

Plan Ahead for Next Year

Next year can go much more smoothly if you start planning now.

Some ways to plan now to avoid credit card debt next holiday season:

• Open a holiday club account at a local bank or credit union. You make regular deposits throughout the year, and the money is available to withdraw in time for holiday shopping.
• Buy heavily discounted wrapping paper and decorations in January.
• Plan your gift-buying for next year while this year is still fresh in your mind. Shop for gifts throughout the year. It spreads out the spending and gives you plenty of time to find deals and discounts.
• Work on eliminating your credit card debt, so that when the holidays roll around, you aren’t adding holiday spending to already high balances. Then pay off your holiday balances as soon as you can.

How to Avoid Holiday Shopping Pitfalls

You can avoid holiday shopping pitfalls that can lead to more debt by:

Buy Now, Pay Later Offers

Buy now, pay later may seem like a great way to stick to your budget, but it can end up costing you more than you’d planned.

Here are some things to consider:

• You’ll be paying them off well past the holidays
• It’s difficult to return items
• There may be high fees involved
• They do nothing to help your credit score

Black Friday Overspending

Black Friday deals are great, but the overwhelming shopping vibe and lure of discounts may prompt you to spend more money than you’d planned. Make sure you stick to the list and aren’t lured into impulse buying or breaking the budget.

Holiday Credit Card Promotions

Your card company may offer no or lower interest on items bought during a certain period of time, or cash back on holiday-season purchases. Don’t let any credit card offers tempt you to exceed your budget, because you will still have to pay that balance and any fees and eventual interest that’s connected to it.

Higher-Priced Item

A favorite tactic of retailers is putting a superior and more expensive item next to the discounted or less-expensive one. You were originally going to buy the cheaper one, but the higher-end one seems like a better deal, because it’s a bigger item, or has more bells and whistles, for not that much more money. Stick to the lower-priced item and stick to the budget.

Free Shipping

Free shipping offers usually require that you spend a certain amount before they kick in. Before you click on “buy,” make sure that you are not spending more than you planned to because you were lured by free shipping. In many cases, the extra you spend to get free shipping is more than what you would pay for shipping.

How to Get Out of Old Holiday Spending Debt

You may still be paying off last year’s holiday spending as this holiday season rolls around. Now you’ll be adding to it. It can be a never-ending spiral that may seem impossible to get out of.

If you want to end that spiral, consider a debt management program. A certified counselor at a nonprofit debt management agency will help you set up a budget and devise a strategy to free you of all that red ink. The agency works with creditors to reduce your interest rates and waive fees, paying down your credit cards as you make one manageable monthly payment to the agency.

The program will get you out of debt, teach you how to stay out of debt and break your credit card habit.

Imagine how much more fun it would be to begin the next holiday season with less debt.