Christmas clubs: Save now to avoid card debt next holiday

By Susan Ladika

Even though the holidays have just ended, this is the best time to start thinking ahead and saving for the next holiday season.

With some planning, you can avoid running up credit card debt to fund the next holiday gift-giving celebration, and instead start tucking money aside today in an old-fashioned Christmas club account. They're still around at your neighborhood bank or credit union.

"It's one of the best moves consumers can make when they think about budgeting for the holidays," says Mike Schenk, senior economist with the Credit Union National Association (CUNA).

But before you open such an account, Schenk recommends that you "go into it with forethought" and set up a budget, outlining how much you'd like to spend for each gift recipient so you can avoid "spending more than you envisioned."

Unlike a traditional savings account, Christmas club or holiday club accounts often have strict limitations, such as requirements that you make regular deposits and caps on how much you can deposit each month. There also may be limits on how much you can put into the account for the year, such as $1,000 or $5,000.

On the other hand, the accounts may pay far higher interest rates than regular savings accounts. As of January 2012, the average statement savings account rate nationwide was 0.14% APY, according to Bankrate.com.

Shop: Some pay higher rates
While some financial institutions pay minuscule similar rates on their Christmas club accounts, others are paying 1 percent APY or more.

It just takes some digging around to find those paying the best rates in your local area, and some accounts carrying high interest rates may be available to anyone, regardless of where they live.  

Along with taking the time to shop around for the best interest rate, it's also important to read all the fine print that accompanies such an account, says Katherine Hutt, spokeswoman for the Better Business Bureau.

Besides being aware of any limits on the amount you can deposit into the account monthly or annually, you also may only be able to establish these accounts during certain months of the year.

And in many cases, you may only be able to access the cash in your account during a certain time period, such as in the fall.

Get the details on the payout
Depending on the bank or credit union, there can be penalties for withdrawing your money before the date of disbursement. For instance, you may not receive any interest if you tap into your Christmas club account in July. That can be a drawback because "a lot of people want to start their shopping earlier," Hutt says.

It's also important to know how the money is disbursed. Schenk says he had such an account at a community bank, but failed to read the fine print. He didn't realize the money would be deposited into his checking account in November, so he inadvertently used his Christmas money to cover other expenses.

"It really is important to pay attention to how these operate," he says.

But if you make sure to use your account properly, "it really does help in terms of financial management to have something set aside" to fund the holidays, Schenk says.

While CUNA doesn't have statistics on how many credit union members belong to holiday clubs, more than 80 percent of credit union members have access to such accounts, he says.

Try a DIY Christmas club
Even for those who don't have access to a holiday account, or who want to avoid the red tape that can accompany them, it may be possible to set up a subaccount from your credit union savings account. You can give your do-it-yourself account any name you want, such as "holiday account," and have money transferred into it regularly, Schenk says. 

The account will typically pay the same interest rate as your regular credit union savings account.

Karen Carlson, director of education for the consumer credit counseling agency InCharge Debt Solutions, cautions that Christmas club accounts "should be part of a bigger savings strategy," and consumers shouldn't just rely on a savings account that is "meant to be exhausted on an annual basis."

Save elsewhere, too
A summer 2011 survey of almost 2,700 consumers by the National Foundation for Credit Counseling found that most didn't have $1,000 set aside to cover an unplanned expense. Only 36 percent said they would tap into their savings account.

And the U.S. Bureau of Economic Analysis's monthly report found that in November, personal savings as a percentage of disposable income was just 3.5 percent, down a hair from the previous month.

For those who struggle to save, establishing a Christmas club account is a good first step to establishing a savings routine, Carlson says.

It's also a good way to introduce youngsters to the notion of saving for goals, says Mark Hoewing, spokesman for InCharge Debt Solutions, who recalls his mother always made him and his siblings set up Christmas club accounts each year. Setting money aside regularly throughout the year, "is a good way to help young people get in the habit of savings."

It's also a good way to keep yourself from facing a pile of credit card bills come January. "Revolving credit is expensive in the scheme of things," Schenk says. If you set up a Christmas club account today, "that way next year you'll be ready."

Updated: January 4, 2012

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