Debt Assumed During Holiday Season Can Have Long-Term Effects

For better or worse, your debt decisions during the holiday shopping season can stick around for a long-time. In fact, it can stick around for years. Consumer holiday spending increased 3.4 percent in 2019 over the previous year and online shopping increased by 18.8 percent, according to the New York Times. And these numbers didn’t include things like automobile sales during the holidays.

How Big is the Holiday Shopping Debt Problem?

Bankrate reports that 56 percent of 2019 holiday shoppers planned to pay for their holiday spending with money they had saved rather than borrowing or using credit cards. That’s the good news. Unfortunately, that left 44 percent of shoppers going into debt to manage their holiday gift-giving for the season. Debt that could easily come back to haunt them if not handled properly. In fact, many consumers may still be paying off 2019’s holiday debts when the 2020 holiday shopping season (or even the 2021 season) rolls around.

What’s the Big Deal about Credit Cards for Holiday Spending?

It’s not the initial debt that is so painful to manage. It’s the interest rates on credit cards that multiples the actual cost of holiday spending for consumers. Something often overlooked at the time of the purchase. The other problem with using credit for Christmas purchases is how it affects the credit score. Even if you make every payment on time and are never a single day late, your credit score will take a ding because your credit utilization is on the rise.

Lenders and creditors prefer to see credit utilization, how much credit you are using compared to how much is available to you, below 30 percent. The closer to your maximum credit limit you are, the higher your credit utilization score becomes which can cause your overall credit score to dip.

This can prevent you from getting bigger loans, such as home loans or even loans for new cars. However, the likelier risk, especially with a long history of timely payments, is increasing in interest rates on new and existing credit cards and any other purchases made with credit, including a new home loan. Higher interest rates mean you ultimately pay more for the goods you purchase.

Addressing the Problem

While there’s little you can do after the fact to curtail holiday spending for this season there are things you can do in the future to avoid this situation and now, to minimize the impact your past year’s spending will have on your financial future.

The first step is to avoid a similar shopping season in 2020. There are things you can do now to help, including:

• Open a Christmas savings account.
• Begin buying gift cards to favorite holiday shopping stores, so you can redeem them during holiday sales.
• Set a budget for holiday spending and contribute money to that budget from every paycheck.

These simple steps help you avoid overspending during the holidays while allowing you to make the purchases you wish to make without resorting to credit and debt to do so.

Paying down last year's debt needs to be a priority to reclaim your good credit and reduce credit utilization. The best route is to funnel all available discretionary funds into repaying your credit cards so those balances and your credit utilization scores will go down. This also helps you pay considerably less for the items you’ve purchased than paying the minimum balance each month allows.