Don’t Run Up Holiday Debt That You Can’t Repay in January

By RODNEY BROOKS

Christmas has always been a big free-spending holiday, especially if you have children. But it’s a bad idea to pile up holiday debt that you will spend the next year paying down.

“With the holiday season, there is always pressure to make sure you get your kids all that they want, ” said Nick Abrams, a certified financial planner (CFP) and president of AJW Financial Partners in Baltimore, Maryland. “It’s really hard for parents to say no at Christmas, even if you don’t have the money. So, we as parents tend to go out of our way and spend money that we don’t have to make sure that our kids have a happy and joyous Christmas.

“But there are a lot of drawbacks to doing that,” he said. “We accumulate this credit card debt that we then spend a good portion of the following year trying to pay off. It’s adding an extra financial burden to the family or the household.”

Americans racked up an average debt of nearly $1,400 last Christmas, according to a survey by MoneyMagnify, and more than half of that was put on high-interest credit card debt, widely considered the worst kind of debt. The additional debt can be especially damaging for Black Americans, who already have much higher debt and lower credit scores than white Americans.

“Of all the race or ethnic groups, Black Americans carry the heaviest debt burden,” says Theodore Daniels, a financial planner and President of the Society for Financial Education & Professional Development (SFE&PD).

The median debt-to-asset ratios for Black heads of households were more than 50 percent higher than that of White families, according to the Employee Benefits Research Institute: 46.8 percent compared to 29.5 percent. Lenders see a higher debt to asset ratio as a higher risk.

Black Americans also have lower credit scores. More than 50 percent of white households had a FICO credit score above 700 (good to excellent) compared with only 21 percent of Black households.

Historically, Black Americans face these daunting challenges because they have historically been low-wage earners, have low home ownership rates, and are thus, forced to buy on credit at higher interest rates.

But Daniels says there are other issues as well. “(Black Americans) want to have something right away and, and don’t think about the ramifications of it down the line or how it’s going to impact them,” he said. I always say that when you use your credit card or acquire any type of debt, you have spent your future income,” he said.  You buy a $500 watch knowing you don’t have the money, so you use a credit card. You are, in effect, saying I’m spending money I will make in January, February, March and April, he says.

The second issue, he says, is that Black Americans make purchases based on the lowest payment possible vs. the lowest cost. That’s the reason car salesmen focus on the monthly payment instead of the price of the car and the interest rate. You end up paying $600 for that $500 watch, in effect paying a 20 percent premium to get the watch now instead of waiting until you can afford to pay cash. “If you look at it that way, you can change your attitude,” Daniels said.

Abrams says Black Americans need to do three things to cut down on holiday debt:

• Do a holiday budget. “Make sure that you develop a budget of what you’re going to spend during the holidays,” Abrams said. “But also involve your kids in the process to discuss with them you know, this is the budget that we have, and then work around that to buy the toys or the gifts that fit that budget. It prevents overspending, but it also starts to teach your kids about money. And it lets them understand that there’s not an infinite amount of money that you can.”
• Avoid credit card debt. “Credit card debt is the worst debt to have because of what you get trapped into,” Abrams said.  “If you charge $500 or $1,000 depending on your credit, the interest rate that you’re paying on that can be anywhere from 9 percent to 20-25 percent. So, something that you spent $500 on, the interest on that can be easily $100.”

His advice: When you use a credit card, pay it off and try not to have large balances. Always have the cash available in an account to pay that balance. And always pay more than the minimum payment, even if it’s just $10 more.

• Start Christmas shopping early. If you know something your kids or spouse want is a big-ticket item, don’t wait for the holidays if you can buy it earlier. “Be realistic and if you don’t have it, be honest and say hey, I don’t have it. Be selective on who you buy gifts for. Not everybody needs a gift.”

Rodney A. Brooks is the author of Fixing the Racial Wealth Gap: Racism and Discrimination Put Us Here, But This is How We Can Save Future Generations. He was Deputy Managing Editor/Personal Finance and retirement columnist for USA TODAY for 30 years. .He served twice as treasurer and as a member of the executive board of the National Association of Black Journalists.  He is a recipient of the NABJ President’s Award and was inducted into the NABJ Hall of Fame in 2021.