How to Manage Credit Card Debt When Holiday Shopping

Americans are heading into the holiday shopping season with rapidly increasing levels of credit card debt.

Credit card balances, which shrank early in the pandemic, rose 15 percent in the third quarter compared with a year earlier, the Federal Reserve Bank of New York reported earlier this month. It was the largest year-over-year increase in more than 20 years, and balances are now close to prepandemic levels. Total card debt, including new purchases and carried-over balances, has reached $930 billion.

Younger adults — those under 30 — and low-income borrowers have higher average balances than before the pandemic, the New York Fed reported. Almost three-quarters of Americans have a credit card by age 25.

That all suggests that some restraint with holiday spending is wise. Card delinquencies are ticking up after remaining historically low for two years, the New York Fed found.

Young adults may feel they are expected to return home for the holidays bearing fancy gifts. But they should keep in mind that relatives are simply happy to be reunited, said Kristen Holt, chief executive of GreenPath Financial Wellness, a national nonprofit debt counselor with headquarters in Farmington Hills, Mich. “Your family just wants to see you and spend time with you,” she said.

Ms. Holt recommended that people talk with family members to set expectations, and perhaps arrange a gift exchange with an agreed-upon price limit — say, $25 — so everyone gets a present, but no one has to break the bank. That can help keep card debt from getting out of control. GreenPath clients who are in their 20s are reporting average card debt of about $11,000, an increase of more than 40 percent from early this year, she said — possibly because of pent-up demand for vacations and other spending, along with a struggle to keep up with inflation.

Akeiva Ellis, a certified financial planner in Waltham, Mass., suggested giving “family” gifts — say, a Fire TV stick for a family who likes to watch movies — rather than presents for each individual. Be aware of expensive assumptions as you make gift lists, she said. Just because you spent $50 on one person doesn’t mean you must spend $50 on everyone. “Before you know it,” she said, “you’ve racked up a big bill.”

Regardless of your age, if your finances are tight, it’s best to say so. “There are years when we can be more generous, and years when we can’t,” said J. Michael Collins, faculty director at the Center for Financial Security at the University of Wisconsin, Madison. “We make money a taboo, but it’s OK to be transparent.”

Making a spending plan can help, said Perry Wright, senior behavioral researcher at Duke University’s Common Cents Lab, which studies financial decision making. People often have a hard time predicting their bills, he said, because they forget common but less frequent expenses — say, a car insurance bill that arrives quarterly rather than monthly. So take time to think, as specifically as possible, about what sort of expenses are likely in the weeks ahead — including gifts and special groceries — and how you will pay for them, he said. “Be deliberative,” he said. “Think about what you intend to do, then ‘right size’ your expenditures.”

And, he advised, include savings on your “spending” list, and set aside some cash. That way, you’ll have some reserves when those holiday bills come due.

Here are some questions and answers about managing holiday spending and debt:

What’s happening with credit card interest rates?

Keeping the lid on card spending is especially important because interest rates are rising, meaning that it will be more costly if you carry balances from one month to the next. The average credit card rate tops 19 percent, up from about 16 percent early this year, according to Bankrate.

Is it better to use “buy now, pay later” financing?

Buy now, pay later services, including Afterpay, Affirm and Klarna, are increasingly popular. More than a quarter of Americans have used them, and most are satisfied with them, according to a new survey from Consumer Reports. The short-term loans, typically offered online at the point of sale, allow borrowers to pay part of the purchase up front, and pay the balance in several fixed payments.

But there’s reason to be cautious in using the services. Users may not consider it a form of credit but, Ms. Ellis said, “It’s still debt.” The loans are easy to get, so people may take out several — and then have trouble juggling them. Consumer Reports found that people who had four or more of the loans at once missed payments at twice the rate of those with fewer loans. The survey also found that 10 percent of people who have used these services reported having difficulty getting refunds or stopping payments for items they never received.

What’s the best way to pay down credit card balances?

If you can’t pay your balance in full, pay more than the minimum required payment. Otherwise, you will take longer to eliminate your debt and pay much more in interest. “Have a rule of thumb,” Mr. Wright said, like paying $10 more than the minimum or double the minimum.

A series of studies by researchers at institutions including The Ohio State University found that people who were able to choose particular purchases to repay — such as coffee at Starbucks or a utility bill — paid more toward reducing their debt. The technique increased awareness of what was being repaid, leading to a perception of greater progress toward reducing debt, a report on the experiments said.

Grant Donnelly, an assistant professor of marketing at Ohio State who was one of the authors of the report, said some credit cards, including offerings from American Express and Chase, have options for users to choose specific purchases to pay over time. But they may charge a fee to set up the payment plan.

You could try a “do it yourself” version, he said, by choosing one or more items on your card statement and paying off those amounts (though you should make sure you meet or exceed the minimum payment).

If you have balances on multiple cards, you’ll pay less interest by paying off the one with the highest rate first, Mr. Wright said. (Check your statement for the rate.) Pay at least the minimum due on the other cards, and pay as much as you can toward the high-interest card until it’s paid off. Then, move on to the card with the next highest rate.

If you have good credit, you may consider a new card with a zero percent balance transfer offer, which lets you pay off the debt over a fixed period of time. Usually, there is a fee of 3 to 5 percent of the balance moved to the new card.