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How not to go broke at holiday time

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.

You should set spending limits by figuring out how much you can realistically afford for holiday gift-giving without going into debt. Make a list of all the people you intend to give a gift, including small gifts for acquaintances. Decide how much you would like to spend on each person on your gift list.

Before you make your purchases, do some comparison-shopping from store to store to determine the best prices. As the Christmas season approaches, many retailers cut prices by as much as 40 percent on selected items.

Pre-paid credit cards are gaining popularity, especially for holiday purchases. Card-users add money to the pre-paid cards and use them until they spend the limit without worrying about interest rates or fees. Steve Streit, CEO of Green Dot Corp., a pre-paid credit card company in Los Angeles, says the card allows consumers to take control of their spending. "When the limit is reached, people can stop shopping," he says. "It offers consumer protection, so if the card is stolen, people's money will be refunded."

Financial advisers also caution people not to get caught up in credit card offers that seem just too good to pass up. Educate yourself about terms and methods credit card companies tend to entice consumers into getting deeper and deeper in debt.

For those company holiday par ties, Stephens says stay within your gift limits. Don't feel like you have to show off. If the family is coming over for a holiday meal, resist overspending to please others. Ask everyone to bring a dish.

The holiday season is that special time for friends and relatives to share in the spirit of gift-giving, but it's also the season of overspending if shoppers aren't careful. Avoid credit card debt, establish a budget and set limits. Pay cash. You'll be glad you did.

COPYRIGHT 2006 Johnson Publishing Co.
COPYRIGHT 2006 Gale Group

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