4 Ways to Stay Out of Debt This Holiday Shopping Season
If you froze your credit cards in a block of ice this Christmas season, you're part of a trend. The use of general cards such as Visa and MasterCard dropped by 11 percent in the third quarter of this year, the credit bureau TransUnion reports. America's Research Group found that, over the Thanksgiving weekend, the lowest percentage of people shopped with credit since the survey began in the mid-1980s.
Partly, that's because 8 million people dropped off the credit card rolls this year -- voluntarily, or forced off when their bank closed their account. In addition, tens of thousands of Americans swore off the credit-card sauce during the recession, in order to reduce their consumer debt. They're succeeding. In the second quarter, the average amount owed on credit cards fell to an 8-year low.
How do you manage to get through Christmas without adding debt? Here are four ways:
1. Shop with cash. Cash is "the King of Christmas," says Britt Beemer of America's Research Group. He's never seen as high a percentage of people paying with dollars rather than plastic. Consumers are setting Christmas budgets, tucking cash into shopping envelopes, and leaving the stores when the cash runs out. Impulse purchases are out.
2. Shop with a debit card. Debit cards sometimes get a bad rap but not from me. They're a plastic form of cash. When you make a purchase, the money comes out of your bank account almost immediately. Consumers seeking budget sanity now use debit cards more than credit cards, and for one simple reason: You don't build up debt.
The rap is that, on paper, they're less safe than credit cards. If a thief gets your debit card, or a merchant sells you something defective, you have fewer legal protections. In practice, however, Visa and MasterCard provide shoppers with the same protections for debit cards that they get with credit cards. If you can't settle with the merchant, the Visa or MasterCard issuer lets you rescind the payment. (Provided, of course, that the merchant is still around and has a bank account.)
Debit-card users do have to think about how reliable the merchant is. But owners of stores in your neighborhood or mall, or big national retailers, aren't going anywhere. If a package doesn't arrive, or arrives broken, they'll give you your money back. Or the debit-card issuer can retrieve it for you. Thanks to a new law, you're also now protected if you try to use your debit card to spend more money than you have in the bank. In the past, the your excessive purchases would go right through and the bank would hit you with an overdraft fee of around $30. Now, such a purchase will be turned down unless you've specifically agreed to accept the fee.
Think of debit-card turndowns as automatic budgeting. Your card won't let you overspend even if you want to. Credit cards, by contrast, love you to overspend -- at 18 percent interest and higher. Looked at this way, debit cards are the "safer" choice.
3. Shop late. Your cash goes further. Beemer says that nearly three-quarters of Christmas shoppers will be in the stores next week. A high percentage say they'll wait until December 24 to finish up. They're looking for prices marked "70 percent off."
4. Ignore the new credit card offers pouring into your mailbox. The banks are ba-a-a-ck. During the second quarter, their credit-card mailings ran 83 percent higher than a year ago, according to Synovate Mail Monitor.
The issuers are lobbing cards not only at people with good credit scores but also at those with blemished histories. They're looking for "good" bad credits -- for example, consumers who walked away from a mortgage but have a job and always made their credit-card payments on time.
These banks aren't doing you any favors. The new cards carry higher interest rates and might also charge annual fees. You'll be offered bonuses and extra cash back if you use the cards during the next two weeks. But that won't help you, if you face January deeper in debt.
Pass these cards by. Once you've gone through the pain of a cash or debit-card diet and reduced your loans, stay lean. Leave those credit cards on ice.
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