Many of us depend on credit cards or loans to pay for holiday gifts. Yet this year, that debt is going to cost you more now than the Fed. rise in interest rates.
SAN ANTONIO — Holiday debt may become the ghost of Christmas past, haunting shoppers for years to come. Higher interest rates mean larger payments for longer periods.
“I suggest everyone if you are on a very tight budget to call it back. We don’t need to go overboard,” said Trae Bodge, a smart shopping expert with AARP.
Overspending can cost you dearly. LendingTree data shows that last year, holiday shoppers had an average debt of $1,250 at an interest rate of 19% with a minimum payment of $50. It cost them about $337 in interest over 32 months. That same amount this year with a 22% higher interest rate means it will cost you $407 in interest over 34 months. This means it will take two more months and $70 more to be reimbursed.
Save on credit card interest by transferring your balance to a 0% interest rate card, if you qualify. Understand what the transfer fees are, when interest will be charged and how much it will be. You can also call your credit card and ask for a lower interest rate. A LendingTree study found 80 percent of people who applied for a reduced interest rate were successful, but few people applied.
Alternatives include Buy Now Pay Later. These services split payments into four equal interest-free installments. They are easy to obtain and users are approved almost instantly. However, be aware that payment schedules for Buy Now, Pay Later services are more frequent than credit cards.
“Buy Now Pay Later loans require payments every two weeks and that’s different from what we’re used to with car payments and credit cards and mortgages where it typically pays once a month,” said said Matt Schulz, credit card industry analyst for LendingTree. com.
It is important to ensure that you will have the money to make the payments. Late payments to the Buy Now, Pay Later services can harm your credit. Having too many Buy Now, Pay Later payments can be difficult to manage. Also, returns can be difficult when using Buy Now, Pay Later. You may still need to make payments after returning the item.
Another option may be store credit cards, but the interest rates are often higher than traditional credit cards. Data from LendingTree shows that regular credit cards charge an average of 22% interest. Store credit cards charge 26%. That means you’ll pay $60 more on a $1,000 balance with a minimum payment of $50.
“They tend to have higher interest rates, even than other types of credit cards, and your average, everyday, regular credit card already has sky-high rates,” Schulz said. “If you’re someone who carries a balance regularly, a store credit card probably isn’t for you because those interest rates are so high,” Schulz said.
Still, store credits often offer discounts and rewards. They are best used if the balance is paid monthly.
So, like Santa, make your list but include alternative gifts to give away.
“Options are important in case you can’t get your favorite present,” Bodge said. “Then if a lot pops up and applies to something on your list, you can count on that.”
She said she’s now seeing discounts between 10-70%, so it’s important to follow prices and look for the best deal on any item.
Other ways to save on your gift list include: Using coupons, cashback apps, and loyalty programs at your favorite stores.