Even the most thorough holiday budgets can miss certain costs. These are the expenses we know about but don't fully account for – or those we simply don't see coming at all. While gift and travel costs might grab your attention when making a holiday budget, retailers often offer additional services that can add up in ways you may not expect.
Here's a familiar scenario: After shopping, you take gifts to the register and are asked, "Would you like to save X% by signing up for a store card today?" For those already stressed by holiday spending, saving 20% or 30% can be attractive, but is it really a good deal?
Let's take a look at some of the hidden costs that could impact your holiday budget.
Interest Charges
The holiday season often encourages increased spending on gifts, travel, entertainment, plus more. According to recent studies, the average household spends between $1,000 and $1,500 during the holiday season.
In reality, many of us don't have enough cash to cover everything we need for the holidays. The result? Credit card debt that can last well into the new year. And with credit card interest levels near all-time highs, this unplanned debt could mean that total holiday spending (including interest charges) may be considerably more than you originally paid.
Around 60% of consumers carry holiday-related credit card debt into the new year. So what's the impact? With rates hovering around 25%, the cost of carrying a balance can quickly add up. For instance, if you accumulate a $1,500 holiday charge and take six months to pay it off, you could end up paying an additional $375 in interest alone.
And this isn't just about the immediate cost. Extended repayment periods can result in a cycle of debt, making it increasingly difficult to achieve other financial goals. As we'll explore later in this week's theme, planning in advance is a great strategy for avoiding unplanned debt.
Point of Sale Add-Ons
Whether shopping in person or online, retailers increasingly offer additional options when checking out. Are they worth it?
Store Credit Cards
During the holiday rush, brick-and-mortar retailers often entice shoppers with immediate discounts or rewards for signing up for store-specific credit cards. These offers can seem like a great way to save money or earn perks, but they may come with a cost.
Store cards come with high interest rates, typically exceeding the rates of non-store cards. While an initial discount might be appealing (especially to those already stressed about holiday spending), if you carry a balance, the interest charges can quickly outweigh the savings. In addition, these cards often have limited rewards compared to general credit cards, making them less of a benefit in the long run. And with another bill to pay, there's also another chance to miss a payment – resulting in fees and even damage to your credit score.
Here's an example of store card potential cost versus benefit: A 20% discount on a $500 purchase might save you $100 upfront. However, if you finance the purchase over time with a high-interest store card, the interest accrued could negate your initial savings. For example, if you carry the debt for six months before paying it off, interest alone could be $70 or more. Sure, some of us may be able to pay off the debt right away and take full advantage of the discount, but that won't be the case for everyone.
Buy Now, Pay Later
Especially when buying online, offers to "buy now, pay later" often appear at checkout. These financing services offer to split payments into smaller, more manageable installments. Spreading out the cost of a purchase over several months without a credit card can be appealing, but there's often a catch.
Few of these offers are free, and the resulting fees and interest can significantly increase your total cost. Always understand the fine print and calculate the total cost before opting for such services. Comparing these options with traditional credit cards or personal loans can also help you make a more informed decision. And remember, like any credit, missing payments can result in additional penalties and damage your credit score.
Extended Warranties
Traditionally sold alongside electronics and appliances, extended warranty options are popping up on more and more items – sometimes on items costing $50 or less. While additional coverage beyond the manufacturer's warranty or to cover accidental damage might sound appealing, the cost can outweigh the benefits.
Extended warranties can cost anywhere from 10% to 20% of the item's purchase price. For lower-priced items, the warranty cost may exceed the potential repair expenses – not to mention the time and effort it takes to even claim the warranty coverage in the first place. Even for more expensive electronics, many repairs can be handled under the standard manufacturer's warranty or through the standard extended warranties offered by many credit cards (read your credit card's benefit policy for more information).
By carefully evaluating the cost-versus-value proposition of extended warranties, you'll make a more informed decision – potentially avoiding unnecessary holiday expenses.
The Takeaway
It's easy to underestimate how much you'll spend on gifts or hosting holiday celebrations. But as retailers and other companies move into services traditionally provided by banks, credit unions, and product manufacturers, there's the potential to simply say "OK" and purchase services that may or may not offer real value.
Of course, there's nothing inherently wrong with a store credit card or an extended warranty, but fully understand the pros and cons before making your decision.
