Millions of Americans will be nursing a holiday debt hangover come January, a new survey shows.
In a survey of 1,147 U.S. adults conducted by MagnifyMoney, more than one in four (26%) Americans said they plan to rack up debt during the 2016 holiday season that will linger more than a month. Among the 26% who will rack up debt, two-thirds said they expect they will need three months or more to pay off the debt.
With the busy shopping season, it can be hard to resist the urge to spend more than you can afford.
Here are 5 ways to avoid holiday debt traps:
1. Steer clear of store credit cards
The holidays are prime time for retailers selling store credit cards to customers. Customers are often wooed by promises of upfront discounts on purchases, helping them save on their holiday shopping in the short term. But store credit cards notoriously have some of the highest interest rates on the market — an average APR of 23.84% versus 16.28% for regular credit cards. People with poor credit may be saddled with store cards with interest rates as high as 27%.
Store credit cards can also come with onerous deferred interest fees — they may offer no-interest promotions for a certain amount of time. But if you fail to pay off the entire balance by that date, you can be slapped with the entire interest balance in one lump sum.
If you want to get a discount on your purchases and signing up for a store credit card is the only way to get there, just be sure you have enough cash on hand to pay your bill right away. With most discounts only 10% to 20% off, you'll actually wind up losing whatever you saved if you get slapped with a 20% or higher interest rate later.
2. Make a budget and stick to it
The downfall of most holiday shoppers is that it is incredibly easy to get swept up into the excitement of shopping. Before you know it, your budget is blown, and it isn't until after the giddiness of the holidays winds down that you realize the extent of the damage. Avoid the holiday debt hangover by creating a budget early and sticking to it no matter what.
3. Exchange 'Secret Santa' gifts with family and friends
Secret Santa is a fun and smart way to drastically reduce your holiday gift-giving budget. Ask your siblings or friends to draw names from a hat rather than buying gifts for everyone individually. You can all agree on a price limit so no one feels like they over- or underspent.
4. Get rid of last year's holiday debt first
The average shopper racked up $1,073 worth of credit card debt last year, our survey found. If you have credit debt left over from last year's shopping, don't pile on more debt and continue to let interest accrue. Consider signing up for a 0% APR credit card and making a balance transfer (check out the best ones of the year right here). You'll buy yourself additional time to pay off last year's debt, and you'll improve your credit score in the process.
5. Start saving for next year's holiday shopping today
If you felt unprepared for holiday shopping this year, it might be because you didn't have enough time to save up. Going into next year, open a savings account and label it "Holiday Shopping." Then estimate how much you'll need to save — $500? $1,000? Divide that number by 10 and set up a direct deposit from your paycheck into that savings account for that amount. For example, if your goal is to save $1,000, you'd need to contribute at least $100 per month for 10 months to reach that goal.
Why only 10 months? That way you can start shopping a bit earlier than December, giving you plenty of time to find the perfect gifts for your loved ones.
MagnifyMoney is a price comparison and financial education website, founded by former bankers who use their knowledge of how the system works to help you save money.