As the winter holidays approach, Americans are scrambling to purchase presents, and nobody wants to be a Scrooge. Consumers with credit cards are expected to put an average of $601.70 on plastic for gifts this holiday season, according to a NerdWallet poll.
But with the average credit card APR at 18%, according to a NerdWallet study, holiday debt that isn’t paid off quickly can result in interest fees. Layaway, another common gift financing tactic, also isn’t a great deal — weeks to months of forethought is required, and the fees can be considerable.
Consumers can save significant dollars by instead using a 0% APR credit card for holiday shopping, or by transferring a balance on a high-interest card to a 0% APR card, according to a NerdWallet analysis. If you can’t find the cash to pay in full right away, here are some holiday gift financing options.
Best option for last-minute shoppers: 0% APR credit cards
Going holiday shopping with a high-interest credit card is no problem if you plan to pay off the debt within a month or two, but carrying a balance longer can result in significant interest payments.
In a Harris Poll survey commissioned by NerdWallet, 15% of consumers who will use a credit card this holiday season report they’ll take three to six months to pay off the amount they spend during the holidays. An additional 5% say they’ll take more than six months.
The longer the delay, the more money you’ll pay in interest. If you spend that average figure of $601 with an 18% APR credit card and repay your debt over six months, it’ll cost you nearly $32 in interest. If you spend $1,000 on gifts, and then take 18 months to repay it, that would cost you over $148 in interest.
Shopping with a 0% APR credit card prevents holiday shoppers from paying interest on purchases. These credit cards offer zero interest only for an introductory period that can range from six to 21 months. Applying for a no-interest credit card now and using it for gift shopping ensures that you won’t pay interest on those expenses, as long as you pay off the balance by the end of the intro period.
Keep in mind that to qualify for many low- and zero-interest cards, you’ll need good to excellent credit. NerdWallet’s credit card comparison tool can help you find the card that’s right for you.
Haven’t done your gift shopping yet? There’s still time to apply for a no-interest card if you move quickly. Ask your credit card company if it can expedite the card so you will receive it within a few business days. If it can’t, see if you can get the card numbers in advance so you can shop online — but note that not all issuers will do this.
Best option for early shoppers: Balance transfer cards with 0% APR
If you’ve already done your shopping on a high-interest credit card, there’s another good option: Transfer the balance to a 0% APR credit card.
Balance transfers typically have a 3% fee, but this cost may be outweighed by savings on interest payments. A few cards don’t even have that 3% fee; see if you can qualify for one before you opt for a card with the fee.
The greater your initial credit card interest rate, the more you can save by switching to one of these balance transfer cards. Additionally, the longer you plan to take to pay off your credit card balance, the more you can save through a balance transfer. A transfer is typically worthwhile if you plan to carry a balance for at least three months. For the 20% of Americans saying they’ll take longer than 90 days to pay off holiday credit card debt, this could be a good option.
For this balance transfer, you should look for one of the no-interest credit cards mentioned above; you’ll just be transferring your balance to it after shopping with a higher-interest card. The no-interest period is still only temporary, typically six to 21 months, so the balance must be paid off in that time frame to avoid interest charges.
Think twice about layaway
Layaway is a popular financing option during the holidays, and it’s often marketed by retailers as a way to make gift-buying easier on the budget. It typically involves selecting an item, forking over a small down payment, making payments for several weeks or a few months, and then picking up the item once it’s paid in full.
But layaway is not usually the best choice for consumers. The service usually includes fees, which can sometimes cost more than the interest on a credit card purchase. Plus, because it can take weeks or months to pay down, it isn’t an option at all for last-minute shoppers. But layaway can make sense if you’re buying items that are likely to sell out fast and there are no fees involved.
To assess the potential savings of using a credit card with an introductory 0% APR, we calculated the payments needed to pay off a balance of $500 and $1,000 on a traditional credit card with an average purchase APR of 18% over a six-month period and 18-month period. We then compared those numbers with the same payments required to repay the balance with a 0% APR.
Infographic by Michael Belen. Image via iStock.