Issue Date: December 23, 2001
Take a bite out of your consumer debt
Did you "charge" into holiday shopping? Check out these timely tips to help keep this season more green, less red.
IN LIGHT OF Sept. 11, the results of a recent study on holiday spending from two Washington, D.C.-based consumer groups should be considered encouraging. More than half of consumers surveyed by the Credit Union National Association and the Consumer Federation of America plan to spend the same amount this holiday season as last year, with a little over one-quarter planning to spend less. And about 10% expect to increase their holiday budget.
But here's the most comforting piece of data to emerge: No matter how much they plan to spend, fewer consumers say they'll use plastic to finance their purchases. Only 22% plan to use a credit card to buy gifts and other purchases, down from 26% last year.
In fact, fewer Americans started the holiday season in debt to their credit cards. Only 38% of Americans are carrying credit card debt, down from 42% last year. Unfortunately, those who are in debt are saddled with a bigger burden. Myvesta.org, a credit counseling organization, saw the average credit card debt of its most seriously compromised clients balloon from $17,800 in 2000 to $48,200 in 2001. "You see fewer people carrying balances," explains CUNA spokesman Mark Wolff. "But of those who do, they tend to be larger."
What can you do if you're among those carrying a balance today -- or have been using a credit card to float your way through the holidays? A few simple strategies to help you manage:
Transfer your balance to a lower-rate card. Despite the tough economic times, consumer debt has risen only from 7.6% of disposable income in the first quarter of 2000 to 7.8% in the second quarter of this year. How could that be? Lower interest rates have made it possible for consumers to pay down their installment debt. If you're toting around a pricey fixed-rate card, it's time to swap it for a more reasonable one. "That's especially easy this year," says Robert McKinley of CardWeb.com (which publishes lists of low-rate cards), "because along with rates coming down, there are many 0%-type offers where you can get a free ride for six months to a year. All indications are those offers will continue through the holidays and afterward."
How good is good? The Federal Reserve's Nov. 6 rate cut is expected to push average credit card rates down to 14.2%, the lowest in 25 years. The best rates are around 9% to 10% for fixed cards, 7% to 8% for variable ones. The only caveat: Scour the fine print for balance transfer fees and other hidden charges.
Use excess savings to retire credit card debt. Even at today's lower rates, you will get a bigger return on your money by using it to pay off credit card debt than by leaving it in a savings or money market account where it's earning a measly 2% to 3% interest. Don't fall into the trap of thinking your money is safer in the bank. If you have an emergency down the road and you've paid off your credit cards, you can always use them to help you through.
Consolidate with a home equity line of credit. The rates on home equity lines of credit are lower than we've ever seen them -- 6.1% at press time and heading down, according to the folks at HSH.com, which tracks them. By consolidating your credit card debts into a home equity line, you not only get yourself a loan at a reasonable rate, you get one on which the interest is tax deductible. If you do this, be sure to put a lid on future charges. Eliminating today's bill does you no good if tomorrow's is even higher.
One last thought: The recent CUNA/CFA study asked people, if given a $5,000 windfall, how would you use the money? Nearly half of respondents said they'd use it to pay off debt. Just something to consider when you open your holiday card from Grandma. You know, the one that still contains a check.
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