How to Avoid the Holiday Debt Trap

Thanksgiving came early this year, and media sources have already reported record-breaking holiday spending in the wake of Black Friday and Cyber Monday sales. The holiday shopping season is in full swing. But beware—more time to shop means more time to spend.

Let's face it, there's no escaping the aftermath of too much holiday cheer, whether it's a few extra pounds or the dreaded hangover. Binging on gifts and entertaining can leave a lasting pain, too: credit card debt.

The average person will
spend $1,007 on holiday
shopping this year, according
to the National Retail Federation.

"When holiday spirits run high, impulse control can vanish. We gobble up that extra cookie, and we splurge on that extra gift," said Gerri Walsh, FINRA's Senior Vice President for Investor Education. "Especially when paying with plastic, it can be all too easy for many of us to bust through our holiday budgets."

This year, consumers report that they will spend an average of $1,007.24 during the holiday season, up 4.1 percent from the $967.13 they said they would spend in 2017, according to the annual survey by the National Retail Federation and Prosper Insights & Analytics.

But there can be real consequences when you buy on a credit card and don't pay it off in a timely manner, or if you divert money set aside for savings or paying your bills on time, and spend on gifts and holiday cheer.

Take this example. If you charged that $1,007 to a credit card with a 15 percent annual percentage rate (APR), and you paid just the minimum each month of about $25, it could take you close to five years to pay off those holiday charges, and cost you over $400 in interest alone.

Luckily, there are ways to plan now to avoid a debt hangover later. Here are five tips to help you exercise restraint this holiday season.

Make a Budget and Check it Twice

Set a budget that won't land you in a financial snowdrift come the New Year. Then try this. At the very top of your holiday shopping list, write the amount you budgeted for spending this year—and see how much less than that amount you can spend. The list should include every person you intend to buy a gift for and the amount you intend to spend on that person. Don't forget other expected costs, such as travel, decorations or food and drink costs if you are hosting a party.

If you know exactly what you want to buy, make sure you note the cost of each item, and scan for any sales or coupons that you can be sure to have handy when shopping. If you do land a gift at a discount, stick to your list and take it as a win. Don't add on additional, unnecessary gifts.

Track Your Spending

The list is just your starting point. Consider using money management apps to help you stay on budget, or a computer spreadsheet to track holiday expenses. If you prefer it the old-fashioned way, pen and paper will do. Just track everything all in one spot, and deduct it from that number on top of your shopping list.

If you end up spending more on one person than you planned, you'll have to find other ways to cut back.

Consider Shopping Solo

Are you the type of person who's easily influenced by others? If so, stay away from big spenders during your holiday shopping trips. Sometimes group shopping excursions can lead to budget-busting spending frenzies, sending people deeper into debt than they had planned.

Reward Yourself With Your Credit Card Rewards

If you plan on charging your purchases, get a handle on which of your credit cards offer the best reward points programs before you hit the stores. That could mean using one card for gift purchases at large department stores, another at some online retailers or another for those holiday food and drink purchases.

Just be careful to stick to your budget. You should view these rewards as a bonus on your holiday purchases, not as a justification to spend more than you originally planned.

Get Smart About Credit Card Offers

While some may look tempting, be sure to read the fine print, advises FINRA's Gerri Walsh. A common feature to look out for is called "deferred interest," Walsh notes. Under this scenario, you might be offered 0 percent interest for a certain period of time. Should you miss a payment or leave any bit of your balance unpaid when the introductory period ends, however, the provider will retroactively apply charges to your entire purchase amount.

That's very different from a standard 0 percent credit card, which only assesses interest on the balance left after the introductory term ends.

Happier Holidays

Sticking to a holiday spending budget doesn't mean you are a Grinch, it means you care about setting yourself—and your family—up for a more secure financial future. And that's a gift that will stand the test of time.