Layaway: Best way to pay for holiday purchases?
Many retailers have brought back the layaway plan to help low-income consumers buy presents during the holidays.
But questions are being raised about the cost of those plans, and New York Sen. Charles Schumer is calling on retailers to be clear about what layaway could actually cost you.
On "The Early Show" Monday, CBS MoneyWatch Executive Editor Jack Otter spotlighted the good and bad about various methods of paying for your holiday purchases.
Top pick - credit cards - but...
... but only if you pay it in full each month and don't carry a balance.
You might actually earn some additional cash by using your credit card for holiday shopping. Card issuers are bumping up their rewards for the holiday shopping season, as they seek to lure consumers away from debit cards and competitors.
For shoppers with decent credit scores, this can provide the opportunity to pick up extra cash or miles while doing their gift shopping.
Credit cards also provide extended warranties and purchase protection, which can provide a little extra coverage for holiday gifts.
Many issuers will even refund the price difference if you find a lower price on the same item from the same manufacturer within a designated time period (typically 60 days).
Beware though -- the worst thing you can do is borrow on your credit card and carry a balance.
Use cash or your debit card
If you have the cash to purchase the items in full, do it. That way, there's no debt to be repaid -- and no interest charges. Also, instead of doing layaway, you could pay yourself by putting the money in a savings account until you have enough to cover the cost.
Use a debit card only if you don't like to write checks or carry cash, and don't think you might need to return the goods later. A debit card takes money right out of your checking account. It is much more like paying with cash than either a check or a credit card.
After you pay by debit card, you can't stop payment the way that you can with a check. And you don't have a chance to dispute the payment if the goods are defective, the way that you do with a credit card.
Layaway
It has its downsides, but it's better than debt.
Layaway enables impulse shopping -- that's one reason stores like it. If you save up for a purchase, you can always change your mind.
Layaway does have a certain old-fashioned appeal: saving toward something you only get it if you put enough money away. Credit cards, on the other hand, offered instant gratification and postponed the pain of debt -- a bad combination that can, and has, torpedoed family finances.
Keep in mind, however, that stores aren't offering layaway again to be helpful -- they're trying to make money. Rather than losing a customer of limited means and no credit, they have found a way to get that customer to spend his or her money with them.