8 tips to keep you from the holiday hole of debt

Written by By Bethany Clough / The Fresno Bee
11/17/08 07:50:22

With the holidays bearing down like a freight train, many consumers may feel like they're frozen in the middle of the tracks.

Tight budgets are pulling at them on one side. And on the other: the allure of expensive gifts, including this year's must-haves, a $300 toy electronic triceratops and the latest Guitar Hero video game costing up to $200.

So is there a way to satisfy those wish lists and your own giving impulses without sliding into a deep, dark hole of debt?

Yes, say credit experts.

Shoppers who are armed with cash and a plan can do it, they say.

And some shoppers may be forced to avoid the plastic as credit card companies lower charge limits on customers -- even those with perfect payment histories -- and raising rates.

Here are eight tips for surviving the 2008 holidays without racking up debt:

1. Start shopping now

Spread your shopping out over time, said Clarky Davis, the "Debt Diva" of Maryland-based CareOne Credit Counseling. You're less likely to need a credit card if you split the shopping over several paychecks, she said.

2. Talk to your family

Now is a good time to talk to extended family about limiting the expense of gift exchanges -- or doing away with them, said Martha Lucey of president of Fresno-based By Design Financial Solutions. She suggested buying gifts just for children, doing a gift exchange with a price ceiling or exchanging presents bought at a dollar store. Families may just opt to share a meal together, she said.

3. Use cash

Shoppers paying with cash instead of credit spend an average of 12% to 18% less, said Bill Hardekopf, CEO of Birmingham, Ala.-based LowCards.com, a free consumer resource on credit cards.

"You're a lot less likely to buy Aunt Mildred that expensive blouse compared to the reasonably priced blouse" using cash, he said.

4. Beware of gift cards

While gift cards are popular, many people overspend on them, Davis said. Often, shoppers who would spend $15 on a gift for cousin Joe spend $20 to $25 when they opt for a gift card so as not to seem cheap, she said.

Get the $15 gift card, she said, but add a personal touch like homemade cookies.

5. Lower expectations

It's OK to tell children you can't afford to buy them something they're pining after, Davis said.

If the gift is coming from Santa, say, "Santa can't fit that in his sleigh this year," she said.

You're not depriving your child if you don't buy him or her a $300 iPod, she said.

6. Make a budget

Decide how much you're going to spend and have the discipline to stick to it, Hardekopf of LowCards.com said.

He suggested looking how much you spent last year and how long it took you to pay off the bill if you used credit.

And be sure to factor in this year's economy.

"If you're about to get cut back at work, obviously you don't want to spend as much as when you're feeling good about your job," he said.

He also recommended not exceeding 30% of your available credit to protect your credit score.

7. Know your limit

If you choose to use credit cards, check your charge limit before you leave the house, Hardekopf said.

A recent survey by the Federal Reserve found 60% of American banks have lowered credit card limits on borrowers considered "nonprime" during the recent credit crunch. About 20% have lowered limits on prime customers. Find your limit on your bill or online account.

And remember that retailers usually don't decline cards when a customer exceeds the charge limit, Hardekopf said. Instead, the purchase will be approved, but you'll be hit with a fee of about $39. Do it two or more times in a 12-month period and you may be labeled a credit risk, get your interest rate jacked up to about 30% and have your limit lowered, he said.

8. You are not alone

And also be aware that everyone is dealing with tight budgets this year, too, said Davis, the Debt Diva. Don't feel bad for cutting back, she said.

"When Vogue magazine -- which to me is the height of consumer spending -- puts in its November [issue] a gift guide for under $500, that to me says that even those people that might have large salaries and live lavish lifestyles may be cutting back," she said. "I like to say frugal is the new black."