After the bustle of the holiday months dies down, many shoppers are left in a state of buyer’s remorse, especially after purchasing overly generous holiday presents on credit with exorbitant credit card interest rates in tow. And of course, the shopping starts as early as the day after (or of) Thanksgiving.
Holiday shoppers are expected to spend approximately $804 celebrating Christmas, Kwanzaa or Hanukkah this year, and 56 percent of people plan to shop online, according to a forecast by the National Retail Federation (NRF).
With hundreds of dollars tacked onto credit lines after the shopping season, the holiday debt hangover is a condition that has disastrous long-term financial effects on credit card users who fail to spend responsibly.
How Credit Card Interest Rates Really Add Up
With so many doorbuster deals, sales and online discounts advertised leading up to Black Friday and the month of December, it’s easy to understand why consumers get so excited this time of year — after all, they’re saving so much money by taking advantage of holiday discounts, or so they’re led to believe.
Credit card shoppers, however, can easily get the short end of the stick. A Consumer Reports study found that 14.1 million Americans were still working to pay off credit card purchases from the 2010 holiday season almost an entire year later.
While bargain hunters earnestly believe they’re saving money by buying discounted goods, the savings falter once credit card interest rates are calculated in.
Here’s a snapshot of how this year’s deals can turn into next year’s credit card debt nightmare (for simplicity’s sake, sales tax is not included in the calculation):
An adult bicycle is currently advertised on Target’s website for $99, and would make a spectacular gift for a relative.
The Credit Karma’s debt repayment calculator states that a $99 charge on a 15.00% APR credit card with $20 minimum monthly payments would take shoppers six months to repay in full, and accrue $4 in finance charges.
It doesn’t look too bad at this point, but as cardholders check off items on their shopping lists, cheery optimism fades.
One of the most sought-after gadgets this year is Apple’s iPhone 6, which retails at $199 with a two-year contract. Putting this purchase on a 15.00% APR credit card and paying only the $20 minimum payment results in shoppers forking over an extra $15 in interest, and would take 11 months to pay down.
Still not convinced your credit card is eating away at your savings? The main consideration to make when assessing these numbers is that the more purchases that are charged, the more interest accrues.
Total Costs of Christmas Presents
As shoppers run through their gift list and grab other holiday necessities like wrapping paper and decorations, credit card purchases start adding up.
Given the NRF’s estimated $804 average holiday cost, with the same conditions outlined above — placing purchases on a 15.00% APR credit card and only making $20 minimum monthly payments — it will cost shoppers an additional $320 in interest alone, bringing the total cost for holiday credit card purchases to an overwhelming $1,124 with a repayment time of 57 months. By then, four more holiday seasons will have occurred.
However, putting Christmas expenses on a credit card doesn’t have to be financially agonizing, as long as you follow a few rules.
Best Way to Pay Off Credit Cards
It’s up to cardholders to reign in the impulse to spend more than they can afford, and learn the best way to pay off credit cards. Practicing smart credit card habits boils down to two basic rules: Don’t max out the card, and pay off credit card purchases in full when the balance is due.
Determining a total gifting budget, as well as how much to spend on specific relatives and friends, can prevent overspending at the store. For example, commit to spending only $50 on mom and dad and $25 on siblings.
Our friends at Money Crashers practice this very strategy.
“Since establishing a budget for my holiday purchases, I’ve done very well at sticking to it,” Andrew Schrage said. “The worst mistake consumers can make when paying for holiday gifts with credit cards is to not implement a budget.
“Choose your gifts prudently, and try not to get too caught up in the holiday spirit of consumerism. Bringing a written budget with you when you shop can be especially helpful to prevent overspending.”
Schrage reminds shoppers to find practical alternatives when hunting down gifts. “Instead of dropping hundreds of dollars for a tablet computer, I focus on something less expensive that can provide many of the same benefits, such as a smartphone,” Schrage said.
Pay Off Credit Card Balances
The second, and equally important, piece to combating credit card interest is to determine whether your budget allows you to pay off holiday presents in full the following month. After creating a shopping budget, you should refer back to your financial situation. Look at income, monthly bills and any holiday savings that might have been growing on the side — once all financial obligations like car payments have been deducted for the next month, evaluate how much wiggle room there is left when it comes to discretionary spending.
Every person’s budget will look different, since everyone has different priorities, but at the very least making sure that necessary bills are taken care of in advance will help reduce potential anxiety the month after the shopping season.
Comedian Jim Dailakis is a supporter of using credit cards for holiday expenses, but he always keeps his finances in mind before charging.
“Before I embark on my online or credit card shopping adventure, I make sure that there’s absolutely, positively enough money for me to make all my purchases,” Dailakis said. “It’s really so simple. Don’t spend what you don’t have regardless of your credit limit. I really don’t think this is rocket science at all. It’s actually common sense.”
Employing these conventional credit card practices prevents the sickening credit card debt hangover so many Americans face in the month of January. Once you master these credit card use guidelines, the next step to becoming a credit card pro is to use rewards credit cards to get cash back on holiday purchases.