How to avoid a holiday debt hangover

By Gregory Karp

Chicago Tribune

Published: Friday, Nov. 26 2010 7:40 p.m. MST

CHICAGO — The idea of an all-cash Christmas in America may be as elusive as a glimpse of Santa himself. But more holiday shoppers intend to avoid a New Year's debt hangover this year.

Shoppers say that instead of credit cards, they will be using debit cards and cash. Seven in 10 shoppers plan to use one of those two methods to pay for holiday purchases, according to a survey by the National Foundation for Credit Counseling.

Of course, what consumers say they will do and what they actually do could be quite different.

"My question is, where are the folks getting the money?" said Gail Cunningham, spokeswoman for the National Foundation for Credit Counseling, who questioned results of her own organization's survey. "I'm cynical about that. I doubt that they have (saved). I hope I'm wrong. I hope they follow through with their good intentions."

Lower use of credit cards might be out of necessity, not choice. Since the credit crunch brought on by the financial crisis, many credit card users have had cards canceled or spending limits lowered. So, consumers might use credit less this holiday season because they have less credit to use, experts say.

In fact, the trend away from credit cards began a few years ago.

Credit card use for holiday gift-buying peaked in 2007, at more than 32 percent, and has trended lower since, according to the National Retail Federation. This year, use of credit cards is expected to be the lowest since 2002, the organization said.

For consumers who end up paying for holiday purchases with plastic, the question is: Will they pay the balance in full when the bill arrives?

That's what Terry Keating, 52, of Chicago, plans to do. He said he'll use his American Express card this holiday season but plans to pay off all his purchases immediately. He said he doesn't have a debt-free holiday season every year, but that's the plan for 2010.

"It doesn't make sense to me to go into debt," he said. "If I cannot afford it now, then I shouldn't be buying it."

A Consumer Reports poll found that 13.6 million Americans remain saddled with last year's leftover holiday debt. And looking ahead, fewer than half of shoppers plan to use a holiday spending budget this year. That typically is a precursor to overspending and, potentially, debt.

Black Friday and Cyber Monday for retailers too often become "Red Tuesday" for consumers, said Dave Jones, president of the Association of Independent Consumer Credit Counseling Agencies.

Consumers will spend an average of $689 on holiday-related shopping this year, according to the National Retail Federation. Imagine if that amount were charged on a credit card with an interest rate of 18 percent and the consumer made only a 5 percent minimum payment each month. It would take four years to repay the amount and rack up interest charges of $225, making the holiday 33 percent more expensive than if cash had been used.

Some consumers are avoiding holiday debt, or compensating for not having credit available, by using old-fashioned layaway plans. These plans, brought back into vogue in recent years by such retailers as Kmart and Sears, allow consumers to set aside items at the store while they are paid off in installments over a number of weeks. Consumers take home the merchandise after they pay in full. Retailers usually charge fees, often $5 or $10, for using layaway.

Of course, layaway fees can be avoided by stashing the cash in a cookie jar at home, then returning to the store to buy the item once enough has been saved.

The challenge with saving money at home, Cunningham said, is the "tyranny of the urgent," when saved money gets spent on various household needs.

"I think layaway is a terrific tool, particularly for those who don't have access to credit," Cunningham said.

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