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Holiday season credit tips
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November 23, 2000: 7:43 a.m. ET
Credit experts give tips on how to avoid a holiday spending hangover
By Staff Writer Alex Frew McMillan
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NEW YORK (CNNfn) - 'Tis the season to spend. And spend too much.
Between Thanksgiving and Christmas, the average American household charges $1,300 on credit cards, according to card tracker CardWeb.com. That means that in a month, consumers drop a hefty chunk of the $4,000 they put on their plastic all year.
The average family spent $1,067 on gifts alone, cash or credit, last year. Consumers spent 27 percent more than they'd planned for holiday gifts, according to the International Mass Retail Association.
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 THE OVERSPENDING SEASON
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On average, consumers spent 27 percent more than they meant to last holiday season.
Source: International Mass Retail Association
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Americans have improved how they handle their finances. Around 44 percent of consumers pay off their credit-card bills faithfully every month, up from 29 percent ten years ago, again according to CardWeb.
But just under half the holiday debt lasts beyond January. And the season can leave shoppers with a lingering financial hangover the rest of the year, possibly longer. Fortunately, financial planners and other experts have plenty of ideas for how you can emerge unscathed.
Stay below a 35 percent threshold
Good economic times don't always make for better consumer finances. Sam Gerdano, executive director of the American Bankruptcy Institute, explained that 1998 was the all-time record for Americans going broke.
The good news? Personal bankruptcies have dropped the past two years. For the 12 months through June, 1.24 million American individuals filed. That data, the most recent available from the Administrative Office of the U.S. Courts, marked an 8 percent drop over the year-ago period.
Delinquencies are also down. But they could rise as interest rates rise, Gerdano warned. Car loans, mortgages, any kind of debt is more expensive. With a slowing economy, finances are tougher this year. Retail sales may slow from last.
Click here for more on the holiday shopping season
The Federal Reserve's increases throughout this year take a while to show up on a personal level, Gerdano said. But eventually they do.
If your debt service accounts for more than 35 percent of your disposable income, that's dangerous, Gerdano said. It leaves you with little flexibility if something goes wrong in your world.
Most people don't get into disastrous financial trouble by overspending. But overspending is an insidious problem that can cause people to go bust if it's compounded by an unexpected event, such as a job loss, family breakup or a big medical bill, Gerdano said.
Strategies for Christmas spending
Many people leave their Christmas shopping to the last minute. Men are twice as bad as women about it. According to the International Mass Retail Association, almost one in five guys had done no Christmas shopping whatsoever going into the last week. Just over one in ten women hadn't bought a thing.
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WHAT ABOUT NEXT YEAR?
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If you haven't saved for presents this year, think about starting a holiday fund for next year, the Financial Planning Association advises.
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But leaving it until late in the holiday shopping season means consumers can't take advantage of sales and bargains, the Financial Planning Association points out. Last-minute shoppers are also unlikely to have saved up, which makes credit all the more tempting in a pinch.
The FPA recommends saving up as far ahead as possible. Why not start a Christmas fund in January? If you didn't do that this year, maybe it's an idea for next, the group suggests.
Buy ahead, if possible, too. Sleep on ideas for gifts. When you do hit the mall, planners suggest you make a list. Stick to it. Mark down what you spend. If you overspend in one area, you need to cut in another area, the planning association points out.
"Sticking to a list reduces expensive impulse shopping, which is typically what gets people in financial trouble," an FPA guide to avoiding holiday blues points out.
Money.com has also created a holiday calculator to help consumers plan their spending. Click here to check it out.
Cash instead of credit
Shoppers can also cut back on their spending by leaving their cards at home. Take cash instead, financial planners suggest, which will likely force you to budget. It will also make overspending more obvious.
Ann Copeland, a certified financial planner in Tacoma, Wash., recommends avoiding shopping altogether. "This time of year especially, they make everything look too good, and it's so easy to overextend your credit card," Copeland said.
If you're short on cash, think of alternative gifts, she suggests. A book of favors, such as coupons for driving trips, homemade meals or to do laundry, is personal but doesn't cost you anything. Such ideas might make an appreciated gift for a grandparent, niece or nephew.
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This time of year especially, they make everything look too good, and it's so easy to overextend your credit card.
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Ann Copeland
CFP, Tacoma, Wash. |
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Tickets to a game, concert or other event may be an affordable alternative to an expensive present, Copeland continued. Classes at a community college – to learn about computers, say – may be relatively cheap but something a loved one has expressed an interest in. Memberships and subscriptions fit the same bill.
Buying tickets to a charitable event or an item at a charity auction "is a total win-win," Copeland noted. You get to deduct the amount you overpaid – the difference between your cost and the market value – of what you've bought on your taxes. Your relative or friend gets a gift they can feel good about receiving.
Paying the minimum is a big mistake
If you buy an unusual item, at least you're not at the mall, buying stuff for yourself while you're at it. "There's so much temptation to do that, when you're out shopping," Copeland said. "Anything you can do to avoid the retail marketplace, the better."
Overextending your credit can be very expensive. Robert McKinley, CardWeb's CEO, notes that the average interest rate offered on credit cards is 16 percent. But with penalties and fees, consumers actually end up paying a weighted average of 18 percent annual interest, he said.
"We're in an environment right now where there's a lot of strain in the profitability of credit cards," McKinley explained. "Issuers are looking to hit you with fees and those sorts of things."
That's 1.5 percent a month. If you're paying just the minimums on your cards, you may well be only paying 2 percent of your debt back a month -- $40 on $2,000 dollars in debt, say.
With the interest clock constantly ticking, it'll take something like 30 years to pay off a $2,000 debt at 18 percent, he said, if you just contribute the minimum. Minimums normally barely cover interest charges.
"Making the minimum payment ... is probably one of the biggest expenses any consumer can make," McKinley said. "You can end up paying for this Christmas for years to come."
What to do after excess
If you do overdo it, pay off the balance as soon as possible, McKinley advised.
Miss a payment, and your card company may remove its preferential rate and begin charging a punitive interest rate. That normally happens after two missed payments, but why chance it?
"Play by the rules," McKinley recommends. "Don't give them any reason to take it [a better rate] away or penalize you in any way."
If you've used more than one card, planners suggest listing your debts with their interest rates. Tackle the most expensive debt first – not necessarily the biggest -- while paying the minimums on the rest.
When you've knocked out one debt, devote your resources to the next debt on the "hit list."
"Don't pay extra money on your mortgage – make it a priority," Copeland said. "Don't eat out twice a week. Don't do the daily latte, until you get that [debt] paid off." 
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