Magazine article Ebony

How Not to Go Broke at Holiday Time

Magazine article Ebony

How Not to Go Broke at Holiday Time

Article excerpt

Holiday spending can turn into a financial headache without proper planning and discipline. A few unplanned presents, and before you know it, you are way over your head in credit card debt that may take months or years to pay off.

The average American incurs about $2,000 in credit card debt during the holidays and takes about 10 months to pay it all off. A consumer Federation of America study indicates that credit card users spend 60 percent more than they planned to during the Christmas holidays. This kind of consumer debt is the single-most factor that keeps people from building wealth and financial security, says Brooke Stephens, author of Talking Dollars and Making Sense: A Wealth-Building Guide for African-Americans.

The high cost of using credit cards is reason enough to limit holiday spending. Interest rates on most credit cards hover at 18 percent. The minimum monthly payment on credit cards is usually calculated as a certain percentage, often around 2 percent of your total balance. Remember, however, that your payment includes interest as well as payments against the principal amount that you borrowed.

On a $2,000 purchase, for instance, 2 percent of the balance is $40. At 18 percent interest, your $40 payment would include $30 in interest and only $10 toward the amount you borrowed. If you pay the minimum balance each month, calculated as 2 percent of your outstanding balance, it will take you more than 30 years to pay off your $2,000 purchase.

Stephens recommends that you leave your credit cards behind and use cash when shopping, but that requires discipline. Another smart money move is to budget early for the Christmas season. If you belong to a credit union, open a Christmas account and make small monthly deposits. If you don't belong to a credit union, you can set aside your own Christmas cash fund, separate from savings and checking accounts. …

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