The Best Way To Pay for Holiday Shopping

The holiday season is here! And while the holidays are a magical time of year, making merry can take its toll on your wallet. Consumers plan to spend an average of $890 per person this year on gifts and festivities. From credit cards offering free miles to stores offering “buy now, pay later,” there’s no shortage of payment options.

And while gift giving can be fun, all that holiday jingle can lead to a big dent in your pocket. That’s why you’re going to want a plan to help you avoid common holiday shopping errors like overspending.

In this post, we will unwrap common holiday shopping errors, popular payment options, and break down the best ways to fund your festivities without creating a financial hangover to recover from in the new year. 

The Reality of Holiday Spending

‘Tis the season for festive cheer. But in reality, although the holidays might bring joy, they also bring substantial financial burdens and credit card debt. Gifts, decorations, entertainment, and holiday travel can add up quickly. It’s easy to get caught up in the hustle and bustle, forgetting the toll the holidays take on your wallet.

Almost half of shoppers will fund this year’s holiday spending with loans or credit cards. Meanwhile, 31% are still struggling to pay off debt from last holiday season. This is especially true of parents of young children who make up 48% of holiday debtors. People with modest incomes and adults aged 28 to 43 are among the most likely to accumulate debt during the holiday season.

The Best Ways To Pay for Holiday Shopping

Before you hit the malls, or, let’s be honest, the internet, for the holidays, you’re going to want to think about how you want to spend your money. Cash, credit cards, and personal loans are all ways to make your holiday come together. But each funding type has its own advantages and disadvantages.

Cash

An exclusively cash-only holiday plan can help you stick to your budget and avoid overspending. When spending is “invisible,” such as when you use a credit card, it can be easy to forget real money is actually being spent. Using a cash-only payment system for the holidays can help you see exactly how much you’re spending. Since you only have what you’re allowed to spend in your wallet, you avoid overspending and taking on debt.

With cash-only spending, you can take advantage of:

• Anonymity. Debit or credit card transactions leave a trail. Companies know exactly what you buy, when you buy, and precisely how much you spend. Using cash avoids leaving a digital cookie trail.
• Discounts. An often-overlooked benefit of cash is the absence of fees. Most merchants must pay a fee, typically 1.5-3%, to credit card companies for every transaction. Increasingly more restaurants and retailers, especially small and local businesses, offer discounts if you pay in cash.
• No Fees. Credit cards often come with annual and late fees. The rate is around 24%. By paying in cash, you avoid extra fees.
• Thoughtful Buying. Paying with cash sets clear boundaries. When you watch money disappear from your hand or your checking account, the financial impact is immediate. 

While cash offers certain advantages, it also has drawbacks:

• Limits Recordkeeping. One of the main disadvantages of using cash is the lack of electronic recordkeeping that comes with digital payments. Unlike credit card transactions, cash payments don’t leave a record of your purchases.
• Potential Security Risk. Carrying cash or storing it at home can be vulnerable. And if you lose cash, it’s probably gone for good, whereas lost or stolen cards can be replaced and funds restored.
• Inconvenient. Counting, handling, and carrying cash can be inconvenient. It can be especially challenging at the holidays when you may not know exactly how much you need when heading out to the stores.
• Limits Your Credit History. Demonstrating responsible financial behavior and establishing a positive credit history. By solely relying on cash, you miss out on the opportunity to build credit.

Using Credit Cards

Credit cards are tools. Like all tools, they can be incredibly helpful when used correctly, but also dangerous when misused. Using credit cards responsibly can help raise your credit score. By making frequent purchases and keeping your payments current, you build a positive credit history, which is reflected in your credit scores.

Credit cards not only provide a chance to build credit. They also offer:

• Convenience. Credit cards are accepted nearly everywhere, making it exceptionally easy to pay for things. And, unlike debit cards, you only need to make one payment per month to cover an entire billing cycle’s worth of transactions. Plus, you don’t need to worry about having a lot of cash on you.
• Rewards. Reward credit cards give you cash back, points, or miles for each dollar you spend. Many offer bonus rewards in categories, such as grocery stores, gas stations, and restaurants. You can earn miles, hotel points, or general-purpose rewards. Rewards cards are ideal for earning on purchases you were already going to make.
• Financing for Large Purchases. Credit cards allow you to purchase something now and pay for it over time.
• Protection. Credit cards offer fraud protection, chargeback rights, and extended warranties, features that debit cards lack. If your credit card is lost or stolen, you aren’t liable for unauthorized charges and won’t lose any money.

But credit cards come with potential pitfalls, including:

• Interest Charges. Credit cards are convenient if you can pay them off monthly, but if you don’t, you could spiral into a series of interest payments and drag yourself deeper in debt.
• Temptation to Overspend. People tend to overspend and buy more expensive items when using credit cards.
• Late Fees. If you fail to pay by the due date, you’ll likely be charged a late fee. Fees add up quickly and can put your finances in a pinch.
• Potential for Credit Damage. Using a credit card can build your credit, but it’s also why using cards irresponsibly can damage your credit. High balances, late payments, and applications for new cards can all knock points off your score. 

Personal Loans 

Personal loans provide the funds you need without draining your savings. They offer a line of credit for your use at your discretion. Funds from a personal loan are deposited as a lump sum into your bank account soon after you’re approved.

A personal loan offers:

• Flexibility. You can use a personal loan for almost anything. You can use a personal loan for nearly anything, such as covering home repairs, medical bills, or holiday spending.
• Potential for Credit Score Improvement. Payment history accounts for 35% of your credit score. Consistent, on-time payments for your personal loan can improve your credit score. It can also improve your credit mix, which accounts for 10% of your FICO Score. 

• Lower Interest Rates Compared to Credit Cards. Personal loans offer more reasonable interest rates compared to credit cards.
• Predictable Payments. Personal loans have fixed rates, making it easier to budget.

Downsides of personal loans include:

• Interest and Fees. The most obvious downside to a personal loan is the interest you’ll incur. Interest is unavoidable with installment loans. You can minimize the amount by paying off the loan as quickly as possible. Many personal loans include origination fees, administrative fees, and early payoff fees. Read the fine print before signing. 
• Higher Monthly Payments. While credit cards offer the ability only to pay the minimum amount, personal loans are billed in installments, requiring you to pay the full fixed amount each month.
• Temporary Credit Ding. When you apply for a loan, the bank will conduct a hard credit inquiry. This results in a temporary drop in your credit score. Your credit will bounce back quickly, but it’s still worth noting the brief adverse effect.  

Smart Spending Tips for the Holiday Season

Before buying a single present during the holiday season, set a holiday budget. A budget provides boundaries for how much you can spend. While most people think a budget is a good idea, few set one or stick to it. But with little intentionality, you can have a joyful season without breaking your budget.

To develop your holiday budget:

• Make a List. Make a list of the items you want or need to buy and note how much you can afford for each gift. Comparison shop online before hitting the stores.
• Set Spending Limits. Write out the names of the people you want to buy gifts for, along with how much you plan to spend on each person.
• Consider Extras. Think beyond gifts. Budget for expenses, including holiday cards, office parties, and travel. If you are planning a party, add food and drinks for your holiday feast as a line item.

To make the most of your holiday budget by:

• Setting Expectations. It’s fine to be upfront with friends and family about what you can and can’t afford. This may mean focusing on kids only or setting up an exchange so you’re only responsible for one gift.
• Be Creative. Lean into homemade gifts or gifts revolving around spending time together.
• Stay Practical. Holiday presents can be an excellent opportunity to give a family member something they actually need. And provide practical gift suggestions if people ask you for ideas. 

Consider a Holiday Account for the Future

Holiday club accounts are special savings accounts designed specifically for end-of-year expenses. They reduce financial stress during the holidays. 

This account offers simplicity, security, and predictability. It allows you to make regular, small deposits throughout the year, with restrictions on early withdrawals to keep you from spending the funds before the holidays arrive. You earn interest on the money throughout the year. The account charges no monthly maintenance fee and has no minimum deposit requirement. Then, just in time for the season, your savings plus interest are made available, giving you a financial cushion right when you need it most.

Holiday club accounts are smart budgeting tools. A holiday club account makes it easy to set a realistic holiday budget. You decide how much to contribute each month. Over time, deposits add up, ensuring you’re financially prepared. 

No more worrying about how to pay for gifts, decorations, or holiday entertainment. Your savings are there when you need them. And since the account is separate from your savings and checking accounts, you can easily keep track of how much you’ve saved toward your holiday budget. 

Shop Smarter, Stress Less With TFFCU

Focus Federal Credit Union can help you this holiday season with our low-rate credit cards or a personal loan. But we can also get you started for next year. A holiday club account with TFFCU gives you a safe place to store your money and often earns compounding interest. This allows you to purchase your holiday gifts without worrying about the budget when the time comes. 

Visit TFFCU to explore our credit cards, savings accounts, and personal loans, so you can shop smarter and stress less this holiday season.

Aiden Ferguson

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