My Spotless Mind

First, the good news: According to a survey by Consumer Reports, more than three out of four holiday shoppers planned to buy at least some of their gifts with cash. That's not just good news -- it's great news for the average household budget.

Now, the mixed news: About half of the people surveyed plan to put some gift purchases on their credit cards. That's fine for everyone who plans to pay off their cards when the bills arrive in January. Almost 60% of us deserve an extra trip under the mistletoe for having such financial savvy.

However, about one-fourth of holiday spenders using their credit cards this month do not plan to pay off their bills until March or later. That means interest charges will pile up, especially if the charges pile onto pre-existing balances. How much will those gifts cost consumers in the end? Let's run the numbers.

First, Consumer Reports says that the average holiday credit card bill will come to $626. Using one of the handy calculators found here at The Motley Fool, I find that if I take until March to pay off that balance, I will owe $21 in interest charges, assuming my interest rate is a randomly chosen 20%. I don't know about you, but I'd rather spend $21 on a manicure and a good book than send it to my credit card company.

If I take all year to pay off that balance, my interest jumps to $70. That's a more than 10% surcharge on my original bill, wiping out all the savings I earned by shopping carefully and tracking down every holiday sale I could find.

But what if I'm more like the 17% of shoppers who plan to charge $1,000 or more on credit cards? Even if I pay off a $1,000 balance by March, I'll still pay $34 in interest. If I take until next Christmas to pay off all those gifts, I'll rack up $112 in interest charges.

Those holiday bargains don't look so cheap when they're charged to a credit card, do they?

With less than a week before Christmas, it may be too late to undo any gift charges you've already put on your credit card. If you're still shopping, however, think about paying cash or using a debit card for at least some of those holiday gifts.

If the damage has already been done, start thinking now about how you can pay off your cards when the bill arrives in January. It may require some budget-tightening in other arenas, but consider how good you'll feel when the February bill arrives.

You might even give yourself a little incentive. Calculate how much you stand to save by paying off your bills immediately, instead of spreading the payments out over a couple of months. Then make a plan for spending that small sum on yourself in February.

Alternatively, you could give yourself a bit of incentive by calculating how much interest that money would earn sitting in a savings account and working for you. A few savings accounts even pay as much as 5% interest these days.

If I save $70 in one of those accounts, instead of spending it on interest for my $626 in holiday gifts, I'll have $74 by the end of the year. That's not a lot more, but $74 in the black beats $70 in the red.

// posted by Barras @ 11:37 PM