Millions of consumers have begun their holiday shopping, snagging sale items either in-person or online, and considering themselves savvy shoppers. At the same time, many lose sight of the fact that regardless of the price, a bargain isn’t a smart purchase if it compromises a person’s overall financial health.
Consumers plan to spend a total of $967 on average in 2017 for holiday items such as decorations and food ($218), gifts for families, friends and coworkers ($608), and other non-gift purchases ($141), according to the National Retail Federation.
To help consumers remain financially responsible during this season of emotional spending, here are 5 reminders of the long-term consequences of over-spending, from the National Foundation for Credit Counseling (NFCC). Some of these can last long after the lights come down and the tinsel is packed away.
• Paying additional interest – Adding new debt to an existing debt load, one which cannot be paid in full when the bill arrives, equals paying a larger dollar amount of interest due to the higher outstanding balance. Even worse, when a balance is carried over from month-to-month on an account, interest is paid on the previous months’ interest. People often boast of buying an item on sale, then pay for it over time, thus wiping out any savings.
• Diminished future borrowing power – An increased level of debt could cause lenders to decline applications for new lines of credit or loans. Since no one knows what the future holds, not being in a position to tap into new credit is something to guard against.
• Diminished future buying power – Buying on credit is a contractual agreement to pay the debt later, often with money that has yet to be earned. Using tomorrow’s money for today’s expenses compromises future spending.
• Lower credit score – Excessive debt often leads to paying late, skipping payments, and utilizing too high a percentage of open credit, all of which could lower the all-important credit score. Further, applying for new lines of credit simply to save money on today’s purchase will not only increase the temptation to spend, but will show as an inquiry on the credit report, potentially lowering the score.