Holiday debt is about to hit 157.1 millions Americans.
For many families, December is the most expensive month of the year. The average holiday gift cost is $738 this year. 64 percent of shoppers borrow money to pay for their gifts.
Finder.com, a personal finance comparison site, commissioned a holiday spending survey that included 1,744 American Adults. The results were shocking. Of the $181.2 billion estimated to be spent in gift purchases, $103.3 billion of that amount will be paid with credit cards and other borrowed funds such as:
- A personal loan
- Short-term payday loans
- A loan from family and friends
How can you and I keep our holiday borrowing and spending to a minimum, both for ourselves and for others? How can we quickly recover if we take out loans, or use credit cards? Michelle Hutchison, Head of PR at finder.com and Money Expert, answered our questions. Find out more about holiday spending and the debt that it can create. Also, learn how to recover from the financial holiday hangover.
The Money Expert Said…
Budget Fashionista – The study shows that 64% of respondents will borrow money and 16% use credit cards. What other sources of borrowing do shoppers use besides credit card?
Michelle : Although 64 percent of Americans are likely to borrow money, our survey revealed that shoppers will rely on savings as their main source of financing. In fact, 36% of Americans plan to use their own savings for holiday gift purchases.
On average, Americans will only withdraw 59 percent from their savings to buy gifts, leaving them with 41 percent for other sources. In addition to credit cards, Americans also borrow from friends and family, take out payday loans for a short time, and use personal loans.
Budget fashionista: We all know what a loan is in theory, but what makes it different from other forms of debt?
Michelle A short-term or payday loan is a small amount borrowed that must be paid back by the borrower on their next pay day, which can take up to six months, depending on where you live. Payday loans are available within hours depending on who you ask and can even be given to people with bad credit scores.
Payday loans carry higher interest rates and fees because they are riskier for the lender. Missed payments can quickly become costly. The cost of a small loan can quickly increase once interest rates are increased.
Payday lenders are accused of preying on the most vulnerable borrowers. The resulting controversy led to several states in the United States banning these loans. It can be argued, however, that all Americans have the right to a certain amount of credit, regardless their financial history.
Budget Fashionista – We often hear about the dangers associated with excessive credit card use during the holiday season. How much do shoppers depend on payday loans or other sources of borrowing besides credit card?
Michelle : 15% of Americans will borrow short-term loans to cover all or part of their gift purchases. A further 3 percent of Americans will borrow from family and friends to cover all their gift purchases. 1.3 percent of people plan to use a personal loan to cover all their gifts.
Budget fashionista: What are some strategies for those who use credit cards or payday loans to purchase holiday goods?
Michelle : You’re not alone if you didn’t save enough money for this year’s gift budget. It’s okay to get a little help at one of the most expensive periods of the year. After the holiday joy wears off, do not let financial stress ruin your start to the new year. You can avoid financial stress by taking a deep breath and refocusing.
1. Balance transfer
Balance transfer cards can help you consolidate debts and reduce interest rates if you are struggling to pay back holiday credit. The last thing you need is to be charged high interest rates on a large amount of debt.
Balance transfers allow you to consolidate all your debts onto one card, and pay it back in smaller installments over a specified period of time. Most balance transfer cards have no interest rates, which means that you will not be charged interest on your debts for a period of time.
Be sure to carefully read all the terms and conditions, including those relating to promotional periods , fees for balance transfers, annual fees, and other conditions.
2. Create a budget
It’s time for you to organize your finances. Prioritize paying off the debts that have the highest interest rates first. The more debt you pay now, the lower your interest rate and the longer you will have to pay it off.
Set up consistent, automatic direct debits to avoid being penalized for late payment. Set aside money for your monthly expenses and you won’t be tempted to take on more debt until you pay off the current one.
3. How to improve your FICO Score
After paying back a payday loan that you took out due to a lack of credit history, you can look into building a FICO score responsibly from scratch. You can get a secured card if you have a regular income and are confident that you will be able to make timely repayments. You should see a significant improvement in your credit score after six to twelve months.
Budget fashionista: How can families, who aren’t able to save much money for the holidays next year, start saving?
Michelle: I shop for holiday gifts all year long. Profit from the sales that occur in 2017. You can then put up your decorations during the holiday season, while everyone else is stressed out.
It might be a smart idea to set up a separate savings account for holiday expenses. Set an annual savings target and make payments automatically each week or every month to achieve it.
Consider the need for your generosity. You should probably include immediate family on your list of people to buy gifts for. Don’t feel obliged to buy gifts for your colleagues, your extended family and all of your friends. Instead, you could start a Kris Kringle in larger circles with a cap of $5 or $10 on the gifts. Set a budget and stick to it. Make a list for those you are buying gifts for. You can track your spending using a spreadsheet, or even pen and paper.
Sign up for alerts to receive email deals. Also, browse cashback websites that will reward you with a percentage back of your purchase after you have completed your shopping at certain stores.
Don’t hesitate to browse vintage and thrift shops. I’ve donated expensive items that were worn once to thrift shops — you can find some hidden gems in the racks. Take your friends along and compete to find the best deal!