The first step to buying holiday gifts: create a budget.
We don’t have to tell you: You already know the holidays are expensive.
But what’s the best way to tackle them with your emergency fund intact and your credit card debt not out of control? (Because no one likes having a financial hangover in January.)
The first step is to create your holiday budget today.
But we’re not saints.
With Thanksgiving just around the corner and holiday fun following closely behind, if you haven’t started saving already, time is running out.
So, let’s just say you don’t have 100 percent of the cash on hand that you’ll need for your holiday expenses. Theoretically. What can you do?
We’ve compiled a list of ways you could fund your holiday fun, from the best to the please-promise-us-you’ll-never-do-this worst.
1. Putting it on a credit card (wisely)
Credit cards only get you into trouble when you don’t pay them back on time, in full. If you can put something on your credit card with absolute certainty that you can pay the whole sum back by the end of the month, that’s the best way, other than cash, to pay for your holiday gifts. Unless, of course, you get major points for using your card. If that's the case in your case, charge away. But set up a calendar alert so you don’t forget to pay off that hefty bill in the midst of holiday madness.
2. Working off of the zero percent introductory APR
As an incentive to woo customers, some credit cards offer a zero percent APR introductory period. In general, taking advantage of that period can be risky — after all, when the period ends, your interest will shoot right back up. But as long as you know exactly how long you have before your card starts accruing interest, you can use the lead time to pay it off entirely.
3. Getting scrappy
If you’ve got a long gift list and you're not making do-it-yourself gifts and you don’t have enough cash on hand to pay off your credit card, see how much money you can loosen up simply by making more of it — that is to say, more money.
Some stores will be looking for seasonal help now, and you could also sign up for TaskRabbit, and make money helping other people run their holiday errands. Do you have a lot of fancy dresses lying around? Sell them on eBay.
4. Opting for layaway
Layaway is kind of like paying for something on credit because you are buying it in installments, but it isn’t actually a loan, and won’t hurt your credit score. Rather, the store will hold the item you want instead of selling it. You put down money for two things: the down payment on your purchase and the layaway fee. (Very rarely, stores will offer free layaway as a promotional deal.) Then you’ll pay off your item in installments, and when you’re done, it’s yours.
Pros: You can pay in installments without taking out credit. You can reserve an item at a special sale price. The process discourages impulse buying.
Cons: Layaway fees are often around 5 percent to 10 percent of the total cost, which is steep considering that this isn’t credit. If you abandon your purchase midway, you can get refunded some of your money, but the store will keep the layaway fees and may charge you extra for things like a “restocking” fee. If the cost of your item goes down, you’re still stuck with the price you locked in.
5. Borrowing from friends or family
Borrowing from loved ones can be extremely tricky. While it won’t hurt your credit report, it can strain your relationships at a time of year when you’ll likely be spending lots of quality family time. Before going this route, think long and hard. If you do decide to ask friends or family for financial help — for example, to help you pay for your plane ticket to visit — then iron out all the details before accepting any money: Are there strings attached? When do you need to pay them back? Will they charge you interest?
6. Putting it on a credit card ... and letting it stay there
Credit cards can be very powerful and useful, but only if you pay them off on time. Paying nothing but the minimums on your credit card means the money you owe will suffer from compounding interest, snowballing into more and more debt. If you can’t pay off the balance quickly, don’t put it on your credit card in the first place. Plus, if you miss any payments, your credit score will take a hit, too.
7. Taking out a credit card cash advance
Most credit card companies will let you take out cash through an ATM or a bank withdrawal, essentially taking out cash where normally they only give you credit. But that’s extremely dangerous. Your initial fee for a credit card cash advance could be as high as 3 percent to 5 percent, and the amount you take out starts accruing interest right away (rather than giving you a month to pay it off as is the case with normal credit card purchases). What's even worse is the fact that the immediately-accruing interest is often at a much higher rate than your normal credit card purchases. In other words, this method is bad news.
8. Bank advance direct deposit loan
This may sound benign — an advance on your salary, which is direct-deposited to your bank account. It sounds legitimate, too, because it’s offered by your bank in exchange for your repayment once you get your paycheck. That’s all well and good, but you live off your paycheck (presumably). So when you finally get that paycheck, if it has to flow straight to the bank to pay off the amount you took out for the holidays, you may have trouble paying rent and other basic expenses. This is an extremely dangerous cycle to get into, because then it’s all too easy to apply for another bank advance to pay those living expenses, and so on. As Fox Business puts it: “An advance on your direct-deposited salary is basically a bank-sanctioned payday loan.”
And as we’re about to see, payday loans virtually always mean trouble.
9. Going for a payday loan
These are also often known as “predatory” loans, and they’re so bad they’re illegal in New York state. The State of New York Banking Department defines a payday loan as “a relatively small (usually under $500), high-interest, short-term loan” in which a borrower gets cash, minus lender’s fees.
The problem is that the loan periods are often extremely short, so there isn’t enough time to pay back the money, encouraging borrowers to keep rolling over the borrowing period. Fees are charged for each transaction, and the interest is sky-high, sometimes 400 percent or more!
In this same bucket of last-resort options there are such other bad options as tax refund anticipation loans and advance fee loan scams.
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