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Thursday, April 17th 2014

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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 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, vice president of economics and statistics with the Credit Union National Association (CUNA).Christmas clubs: Save now to avoid card debt next holiday

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.

Shop: Some pay higher rates
On the other hand, the club accounts may pay head-turning interest rates compared to typical savings accounts, with a handful yielding more than 3 percent. That's at a time when the average money market savings account rate nationwide as of January 2014 was 0.12 percent Annual Percentage Yield, according to Bankrate.com.

You're far more likely to earn at least 1 percent APY on your holiday club account than you are on your traditional savings account, though some financial institutions pay minuscule rates on both types of accounts.

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.

It really is important to pay attention to how these operate.

--  Mike Schenk 
Credit Union National Association 

You also may be required to have the money transferred into your Christmas club account on a regular basis from another account that you have with the same bank or credit union.

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, a survey of credit unions more than a decade ago found more than  90 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
Saving is a habit more Americans need to acquire, multiple surveys show. A February 2013 survey by the Consumer Federation of America said only half of American households report good savings habits. More than one-quarter of Americans have no emergency savings and only half have enough to cover three months' expenses, a Bankrate.com June 2013 survey of more than 1,000 adults found.

And the U.S. Bureau of Economic Analysis's monthly report found that in November 2013, personal savings as a percentage of disposable income was 4.2  percent, down from 4.5 percent the previous month.

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

The accounts also are a good way to reduce holiday stress. "For most consumers, one of the most stressful things they have to deal with are unexpected expenses, especially if they're big, unexpected expenses," Schenk says. "Most consumers treat holidays like they are an unexpected event. They're needlessly adding a lot of stress to a stressful time of the year."

Going into the 2013 holiday season, the National Retail Federation predicted the average holiday shopper would spend more than $700 on gifts, decorations and other holiday items..

Saving up in advance is 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, "next year you'll be ready."

See related: Strategies for building your emergency savings fund

Updated: January 16, 2014


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