Holiday Credit Gluttony
It’s no secret the holidays bring the urge to splurge for millions of Americans. Whether it’s guilt to put on that holiday party or buy that extra gift you really can’t afford or the serendipitous pay-for-it-later mindset that grips many every year, the credit card bills that arrive in January continue to grow.
According to a December 2018 blog post on personal finance website MagnifyMoney.com, the average amount of debt accumulated by 1,000 survey respondents was $1,230 during the 2018 holiday season, up from $1,054 in 2017 and $1,003 in 2016. And it’s not only credit cards people are reaching for when it comes to gift buying. It turns out that holiday debt accumulates through a variety of means. The report presented an interesting debt spread:
- 68% on credit cards
- 14% on personal loans
- 10% on store cards
- 7% on payday loans
- 1% home equity loans
In addition, 62% of respondents said they feel stressed by the amount they spent and 49% said it will take them five months or longer to pay off the shopping sprees.
The holiday season is also a time of year where even those who have undergone credit counseling put aside their drive for discipline, says Thomas Nitzsche, a spokesperson for Money Management International, a credit counseling service with offices in Las Vegas.
“We do typically see a decline toward the end of the year and lift early in the New Year,” he says. “We try to give people tips to navigate this time of year, but I think there’s a lot of people trying to keep up with the Joneses or keep up with their own historical level of celebrating or gift-giving…There really is a lot of psychology that goes into gift-giving this time of year.”
How ‘mental bookkeeping’ fails us
The holiday season brings excitement, but also its share of psychological stresses that reduce self-control. Factor into that socio-demographic pressures and poor money management skills and it’s a recipe for debt accumulation, says Nadia Pomirleanu, a UNLV associate professor of marketing.
“Recently, even personality traits such as conscientiousness, neuroticism, extraversion have been linked to holiday spending,” the professor adds.
She also says “mental bookkeeping” is something that plagues certain consumers. It’s a fallible means of controlling expenses that sometimes allows people to justify frivolous spending.
Pomirleanu gives the example of a person making the decision to not buy basic cable for the past few years. At a savings of, say, $35 per month for several years, tremendous money has not been spent, the mental bookkeeper asserts, so that savings justifies suddenly buying a new couch for the living room or an extravagant holiday gift for the family of equal value to the savings accumulated. This time of year, mental bookkeepers may leverage these past savings, accumulated over time, to justify a compulsive purchase today.
“Consumers can get creative to get around their own rules of spending, especially when expenses can be classified in different, subjective categories, like food and/or entertainment. Or when we look at some costs and interpret them as benefits,” Pomirleanu explains.
She suggests consumers implement “precise rules and precise spending categories, established in advance, in which to classify…spending. If these are clear a-priori, then it will be easier to control over-spending.”
Overcoming guilt and pressure
Guilt has always been a great motivator to spend money, especially during the holidays. According to the 2018 Bankrate Holiday Gifting Survey, more than two in five shoppers (45 percent) feel pressured to dig deeper into their pockets than they’re comfortable with. More than half (54 percent) of respondents with children felt pressure to overspend. More than half of those with incomes between $50,000 and $75,000, considered middle income, felt pressured to overspend, too. All this guilting has people feeling less cheery too, as 13 percent of all surveyed said they were willing to skip or boycott gift-giving altogether, if they could.
So, ditch the guilt and put a debt-less future first, says Kimberly Palmer, a personal finance expert for NerdWallet.
“Instead of feeling like you ‘should’ buy something for someone, consider making something instead, or giving them a card or homemade item like baked goods. Then, they will know you care, you won’t feel guilty, and your budget won’t be strained,” she offers.
Nitzsche says drawing names for gifts with groups instead of buying for everyone can help. Be honest about your financial situation with yourself and your family, he adds. Since the Great Recession, he believes people are more understanding if friends and loved ones living on a tight budget.
“I say give the gift of time spent together or other things that are not going to drain resources,” he says. “I think a lot of people understand the fact that a lot of us don’t want to give out of guilt, so they won’t think poorly of us.”
Plan now for next year
Nitzsche says it may be too late to plan for this year, but a quick analysis of last year and this year’s spending can help you budget for the 2020 holiday season. He and Palmer recommend earmarking a small portion of each paycheck for the coming year.
“One of the best gifts you can give yourself is to go into the new year without additional credit card debt,” Palmer adds. “Start saving for gifts as soon as possible, and then only spend the money you have already put aside.”
Throughout the coming year, keep your financial house in order, too. Use cash as much as possible and get a handle on your credit card balances before the next holiday season, Palmer adds. Set a goal to minimize or eliminate credit card debts entirely, if possible.
Some people use credit cards for cash rewards or travel points, too. Those cards are only valuable if you are able to pay off the card with no, or minimal, interest expense, Nitzsche explains.
“It’s amazing to me how people will have some of these cards almost maxed out, paying 100s in interest every month. But they’re reluctant to close them because they don’t want to lose the rewards…If you’re not paying it off every month, you’re likely losing money,” he says.
If your spending habits are out of line, you may need to take some drastic measures, Nitzsche says. Some clients will crease cards so they cannot get them through credit card machines. For those who shop online extensively, disabling apps that allow for one-click shopping may also be required.
“These decisions give you a little more time to consider the purchase, especially with online shopping,” he says. “You can ask yourself if you really need it. There’s a good chance it may just be an impulsive buy.”
And that’s advice you can take to the bank – not the credit card company.