Holiday spending can lead to financial hangovers
By Ben Woolsey and Emily Starbuck Gerson
The holiday season is a wonderful time for relaxing with family and friends and exchanging gifts. However, ongoing economic troubles can make it hard to save up for all that holiday spending. In fact, a USA Today/Gallup poll conducted in early November 2008 showed just 32 percent of consumers are increasing their savings in response to the economy's downturn. With budgets stretched thin, putting presents on plastic could mean January brings a sobering wakeup call for many shoppers when the post-holiday bills arrive.
|Credit card balance transfers|
Steve Smith, personal finance expert and president and CEO of Finicity, a company that provides online money management tools, warns about such trends. "Consumers do a pretty good job of managing their cash flow, but a poor job of anticipating periodic spending requirements, such as the holidays," Smith says. "Whatever you plan to spend for the holidays, you've got to be setting aside money all the way through the year so the money is there when you're ready to spend it. People just spend their account balance to zero, and when they have a vacation or holiday, they haven't planned for it. So they pull out their credit card."
It doesn't have to be a chilly winter of discontent in your household, especially if you are able to pay your bills on time. Late credit card payments, even if you're only a few hours past the due date stipulated in your credit card agreement, can trigger a landslide of expensive rate adjustments. Default pricing will usually kick in, raising your interest rates up to 30.99 percent in some cases.
If you have an onslaught of bills after the holidays and can't pay them all at once, develop a payment strategy. Amanda Walker, a manager with nonprofit credit counseling service GreenPath Debt Solutions in Michigan, recommends a way to prioritize. "If you have to make a choice when it comes to bills and credit cards, GreenPath recommends always paying secured items, such as housing and vehicle loans, first," she says. "Until these loans are paid off, your lender retains ownership. Utility bills, insurances, loan payments and household expenses like groceries and gas fall next in line. Finally -- and although they seem like a large, dark cloud over your head -- unsecured credit card accounts and medical bills should be paid last."
Smith says some of the most common mistakes people make to get out of credit card debt include cashing in a 401(k) plan, signing up for another credit card or getting a payday loan. "These all happen because the person is reacting very quickly to debt and not making very solid decisions," Smith says. "They need to recognize that credit card debt probably doesn't go away unless they stop creating it."
So how do you get out of this post-holiday mess? A prudent thing to consider for those with less than attractive interest rates is a new balance transfer credit card that offers low APRs for 12 months-- even 0 percent, though those offers are becoming less common as credit tightens -- and low variable interest rates thereafter. This allows you to move balances racked up over the holidays to greener pastures and steadily pay them down during 2009. Nothing is worse than still paying interest on last year's presents when the next holiday season comes up, not to mention still owing the entire principal amount to the credit card issuer.
Walker says while a balance transfer can be helpful for some consumers, you should read the fine print to understand how long the low rate applies, what the balance transfer fees are and what standard interest rate will apply later. "Overall, a consumer should calculate if the transfer will be a savings over the current rates of the debt," she says.
Smith also advises consumers to stop digging the hole, and get a product such as Mvelopes, which his company makes, to track spending and set aside money from your monthly cash flow. Similar money management products include David Bach's Automatic Money Manager, Mint.com and Buxfer.com.
"Recognize that credit cards can be very convenient, but can also be very costly," Smith says. "Change the behavior. Cut back on spending, figure out where you are wasting money and apply that to larger credit card payments and continue to pay debt down on a dedicated amount per month. Stop using your credit card while shopping if possible." Once you get in the habit of regularly putting money aside, next year's holidays will leave you debt free.
See related: Balance transfer calculator
Published: December 30, 2008
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