The True Cost of Christmas Credit 

"’Tis the season to be jolly, fa la la la la la la …” Ouch. While the final month of the year is characterized by gift buying, giving and general merriment, generosity usually gives way to buyer’s remorse and worry over debt in the first few months of the new year. How much remorse a person feels depends largely on how he or she paid for the festivities: in cash, with credit or a mix of both.

The Cost of Christmas Credit 

Say you budgeted $1,000 for all holiday expenditures: gifts, tinsel, meals and all. Mid-December, you realize it wasn’t enough, so you decide to use your credit card to cover the remaining expenses. At the end of the season, you rack up a $500 credit card bill, which in your opinion isn’t bad — right?

If your credit card has an interest rate of 17.98% — which is average for a person with good credit — your $500 shopping spree will cost you an additional $99 in interest, assuming you make the minimum $25 payment each month. It will take you two years to pay off your single month of merriment.

Now, say you didn’t start to save for Christmas until mid-October, so you ended up having to put $1,000 worth of expenses on credit. Assuming you plan to only make the minimum payment, it would take you 28 months and $226 in interest to be debt-free.

Finally, say you didn’t budget at all for the holidays. You rack up $1,500 in credit card debt and plan to only make the minimum monthly payment of $45. It will take you 47 months and $595 in interest to reach a $0 balance. For many people, four years of carrying debt and a wasted $600 is not worth the short-lived joy of the season.

Incentives to Avoid Christmas Credit 

 Whether you end up having to pay $100, $200 or $600 in interest, every penny you put toward interest is money wasted. If you go over your Christmas budget by about $500 every year, that’s $100 every year you could put in an investment account. While $100 a year may not seem like a lot, you could end up earning between $1,000 and $10,000 in interest at the end of a 20-year term, depending on the account’s interest rate. Now, imagine if you doubled that yearly investment; the potential savings could be enough to convince you to stick with your Christmas budget, even if it does seem tight at the time.

Say you go over your Christmas budget by $1,500 every year, though (or you don’t budget at all). You may not miss the $600 in interest right away, but you will once you realize how much more you could have saved by using that money in a more concrete way, such as paying down your mortgage loan.

For instance, if you take the $600 you would have spent on Christmas credit card interest and put it toward one year of mortgage payments instead, you can shave $8,121 and two years off your mortgage. Imagine if you did this every year. You could cut the cost of your home and your repayment term in half. With the holidays right around the corner, these types of savings and investment opportunities are things you should be thinking about as you start to decide your Christmas budget.