In a new survey of 1,147 American adults conducted by MagnifyMoney, more than one in four (26%) Americans said they plan to rack up holiday debt during the 2016 holiday season that will linger more than a month. Among the 26% who will rack up debt, 66% expect they will take three months or more to pay off the debt.
Holiday debt can quickly spiral out of control. MagnifyMoney found the average shopper surveyed who added debt during the 2015 holiday season racked up $1,073.
Using a credit card with average APR of 16% and making monthly minimum payments of around $25, it would take that person more than five years (61 months) to get out of debt, according to MagnifyMoney’s Credit Card Payoff Calculator. Over that time, he or she would pay an additional $496 worth of interest charges.
Nearly one-third (32%) of this year’s survey respondents said they incurred holiday debt during the 2015 shopping season. People who took on holiday debt in the past are much more likely to take on debt this year because they can’t afford to pay cash, our survey found, with 74% saying they will incur debt this year. They are also more likely to feel financially stressed.
Among those respondents who incurred credit debt during the holidays in 2015 , the average shopper added $1,073 of holiday debt. And a staggering 74% said they will likely take on more credit debt again this year.
More debt = more financial stress
More than half (59%) of respondents who took on debt over the holidays in 2015 said they accumulated $500 or more of debt. Among people who said they racked up $500 or more in holiday debt in 2015, MagnifyMoney found greater trends of financial stress and a greater likelihood of incurring additional debt in 2016.
Check out our full survey findings below or download a fact sheet here.
Kellie Pelletier, Public Relations
Mandi Woodruff, Executive Editor
MagnifyMoney’s Tips on How to Avoid the Holiday Debt Trap:
1. Steer clear of store credit cards
The holidays are prime time for retailers selling store credit cards to customers. Customers are often wooed by promises of upfront discounts on purchases, helping them save on their holiday shopping in the short term. But store credit cards notoriously have some of the highest interest rates on the market — an average APR of 23.84% versus 16.28% for regular credit cards. People with poor credit may be saddled with store cards with interest rates as high as 27%.
Store credit cards can also come with onerous deferred interest fees — they may offer no-interest promotions for a certain amount of time. But if you fail to pay off the entire balance by that date, you can be slapped with the entire interest balance in one lump sum.
If you want to get a discount on your purchases and signing up for a store credit card is the only way to get there, just be sure you have enough cash on hand to pay your bill right away. With most discounts only 10% to 20% off, you’ll actually wind up losing whatever you saved if you get slapped with a 20% or higher interest rate later.
2. Make a budget and stick to it
The downfall of most holiday shoppers is that it is incredibly easy to get swept up into the excitement of shopping. Before you know it, your budget is blown, and it isn’t until after the giddiness of the holidays winds down that you realize the extent of the damage. Avoid the holiday debt hangover by creating a budget early and sticking to it no matter what.
3. Exchange ‘Secret Santa’ gifts with family and friends
Secret Santa is a fun and smart way to drastically reduce your holiday gift-giving budget. Ask your siblings or friends to draw names from a hat rather than buying gifts for everyone individually. You can all agree on a price limit so no one feels like they over- or underspent.
4. Get rid of last year’s holiday debt first
The average shopper racked up $1,073 worth of credit card debt last year, our survey found. If you have credit debt left over from last year’s shopping, don’t pile on more debt and continue to let interest accrue. Consider signing up for a 0% APR credit card and making a balance transfer (check out the best ones of the year right here). You’ll buy yourself additional time to pay off last year’s debt, and you’ll improve your credit score in the process.
5. Start saving for next year’s holiday shopping today
If you felt unprepared for holiday shopping this year, it might be because you didn’t have enough time to save up. Going into next year, open a savings account and label it “Holiday Shopping.” Then estimate how much you’ll need to save — $500? $1,000? Divide that number by 10 and set up a direct deposit from your paycheck into that savings account for that amount. For example, if your goal is to save $1,000, you’d need to contribute at least $100 per month for 10 months to reach that goal.
Why only 10 months? That way you can start shopping a bit earlier than December, giving you plenty of time to find the perfect gifts for your loved ones.