Funds In The Sun
Sydney Morning Herald
Wednesday December 2, 1998
CHRISTMAS is just one day, and yet some people pay for it for the whole of the year. So says Margaret Kilby, joint co-ordinator of the Ryde/Eastwood Financial Counselling Service. It's supposed to be the festive season, but for credit counsellors, it is the calm before the storm. It's no coincidence that their busiest time of the year is after the Christmas splurge.
"Most people give their credit card a hiding in the last week [of Christmas spending], and the bill doesn't come until January," Kilby says. The result: "February is usually our busiest month."
Credit Line's Betty Weule says the problem stems from the last-minute spending splurge: "We are still seeing some people from the Christmas before."
It can seem like the financial deck is stacked against you at this time of the year - first comes Christmas, then the January sales, and then, for many, the expense of school holidays as well. Nevertheless, the behaviour of some people in the Christmas period is nothing short of foolhardy.
Amazingly, Kilby says, some people delay making their normal payments just because of Christmas. "It may be a regular bill or a car repayment or even a mortgage or rent payment," she says.
Equally, some people put Christmas on the mortgage, using their line of credit home loans to finance the festivities. "This turns short-term debt into long-term debt," says Ursula Bonzol, from the investor education company Money Skills.
Kilby has noticed particularly that families who don't have a lot of money try to make it up to the kids at Christmas time. But it is possible to get through Christmas - and have a good time - without breaking the budget.
While the Scrooge McDucks of the world may well decide to give out IOUs at Christmas and buy all their pressies during the January sales - or worse still, not give presents at all - controlling Christmas spending doesn't have to be that drastic.
But you can't avoid breaking the budget unless you make one, and this is the advice from every adviser Money spoke to.
Decide whom you intend to buy presents for, and how much you want to spend on each one, and think about the food and entertainment expenses you will incur, suggests Michael Migro, head of retail customer management with Westpac Financial Services.
"If you don't, it will get away from you," he says. "Set a realistic budget. Forget the food and entertainment expenses you have had for the other 11 months of the year. This is Christmas and it will cost more."
Weule agrees. "Most people don't sit down and work out what Christmas will cost," she says.
When you get down to details - Christmas dinner, decorations, cards as well as the presents - it is amazing how it adds up, she says. When you buy presents, consider lay-by - an option available only if you are organised enough to do your Christmas shopping a few weeks early.
"It is tempting to use credit cards, but lay-bys are best for Christmas," Kilby says. "You can delay picking it up and you can make the payments in cash."
But by now, she fears, people may be panicking and deciding to put everything on the card.
Migro agrees that leaving it until the last minute is a mistake. "Try and buy presents on a regular basis rather than buying them the night before," he says.
Vivienne James, executive vice-president at Bankers Trust and author of The Woman's Money Book, says if you start your Christmas shopping now, you are more likely to pick up the best price.
And she, too, says credit cards can be the biggest risk of all. "People get caught up in the emotion of gift giving and end up paying for it during the rest of the year."
She agrees people should write down whom they are buying presents for and how much they intend to spend. "It gets the budget into perspective. You may even find you have to cut back on a couple of people."
Weule says: "Don't get carried away with impulse buying for gifts. In the hype of Christmas week, goods are at maximum prices and people have no time to shop around.
"That's when most of the sales take place and most of the goods get put on credit."
If you do use credit, be judicious.
"Limit your spending to one credit card and not necessarily the one with the largest limit," Migro says.
Multiple credit cards are a particular problem, says Jeremy Oorloff, portfolio manager for savings and investment products with NRMA Financial Services.
"People lose track of what is spent," he says.
Bonzol says if you are going to use only one card at Christmas, make it the right one. "It is really important to keep away from store-based cards," she says. "You can find yourself paying exorbitant interest rates. If you know it will take you a few months to pay off the credit card, use one with no interest-free days."
She says you can save 1 to 2 percentage points a year in interest this way, and they often have lower annual fees.
And just because the bank sends you a letter offering to increase your credit limit, that doesn't mean you should let it. In fact, all those spoken to agree that you shouldn't.
"Don't just increase your credit limit because the banks offer it," Weule says. "Even if you don't think you will use it, you will."
Equally, there is no obligation to spend up to the limit on the card. "People think their credit card limit is how much they have to spend, not how much they have to pay for," she says.
While Weule and the others singled out credit cards as the biggest Christmas menace, the "pay no interest until 1999" deals offered by many retailers are of concern as well. Credit counsellors report that the interest-free deals look attractive during the festive season for a number of reasons.
Funds may be short and it can seem urgent to get new appliances and furniture into your house before Christmas - especially, Kilby says, if it is your turn to host lunch and you want to impress family.
The other attraction is that people think interest-free periods will free up their money for other purchases. "If you can't afford to pay for it now, what is going to be different in six months time?" she asks. "It is delaying the inevitable."
Weule agrees. "If you pay off the total in six months, fine. But if anything is left over, even a small amount, you are charged interest on the whole amount from the day of purchase."
For those blessed with children, the spending spree doesn't end in December. Compounding the Christmas expense are the school holidays.
"The credit card bill from Christmas comes in January, but then if you have kids they are on school holidays and it is still spend, spend, spend," Kilby says.
"In the United States, they take three days off and then go back to work. Here, the kids are off school and many people take holidays as well."
Then there are the January sales.
"One of the traps is that people do their Christmas shopping now, and take the Christmas credit card option, and then the January sales are on so the temptation is there again," Oorloff says.
But Bonzol stands firm. "If you have blown your budget, don't go to the sales. Don't set yourself up for an even worse situation. Go to the beach instead."
A five-point plan for surviving the hangover
CREDIT card spending in December can be like a wild Saturday night party, but the January fallout is like waking up on Sunday with a hangover.
No matter how careful you are this Christmas, chances are your credit card is going to take a beating. To ensure you won't be paying for your Christmas splurge for all of the next year, Money asked the experts for a five-point plan to pay off the debt.
* Make sure any credit card debt that will not be paid by the due date is on a no interest-free days card, rather than an interest-free days one. The interest rate will be lower and it may have a cheaper annual fee, says Ursula Bonzol from Money Skills. And, she adds, avoid store cards altogether.
* Set yourself a target for when the card will be paid off, "say three or four months", says Westpac Financial Services' Michael Migro. "This is the first golden rule."
* Make sure that by the end of each month you have paid off more than you have increased the debt by. And put any extra money on the card. "If you get a Christmas bonus, set aside a proportion of the Christmas bonus to pay the debt," Migro says.
Bonzol agrees: "Always set up a repayment plan. Nobody wants to be still paying it off in June."
* Migro suggests having a moratorium on using the card once the kids have gone back to school. "Decide not to use it during the months of March and April." But be sure that you keep paying it off.
* If the debt is really large, consolidate it into a personal loan. Then rethink your credit habits. Don't run the card debt up again, and consider decreasing your card limit.
"If you have incurred that much debt that the only way out of it is to consolidate the debt, it means you have been irresponsible," Migro says.
"No matter what the limit is, you have to try and control yourself. If you have to do something as radical as decreasing your limit, maybe you shouldn't have a card at all."
DEBT CONSOLIDATION - Wrapping all your loans up into one.
© 1998 Sydney Morning Herald
