How Much Will Your Holiday Debt Really Cost You?

Last year, the average holiday shopper spent $407 between Thanksgiving Day and Sunday, according to the National Retail Federation, but that’s sometimes just the beginning of end-of-year spending sprees.

Let’s start with a simple scenario of how much this could really cost: You only spent that $407 and finished your holiday shopping during the Thanksgiving weekend, and you put all your purchases on a credit card. You have a few options: Pay the balance in full when it comes due, make minimum payments or choose another amount to pay each month, until the bill is satisfied. That $407 could end up costing you considerably more in accrued interest and take more than a year to pay off.

For example: If you have a credit card with 15.9% APR and you only make a $25 minimum payment on your balance you would still be paying for this year’s holiday gifts two summers from now. Using our credit card payoff calculator, that payment plan comes out to $462 with interest over a year and seven months. If you have a low credit limit on that card, you may also experience a drop in your credit score, because until you pay off the balance, your credit utilization ratio may be high — it’s one of the most influential things in determining your credit scores. (You can check your credit scores for free on Credit.com.)

Increasing that payment from $25 to $50 a month saves you nearly $30 and takes only nine months. Still, that’s a long time to pay off a somewhat small credit card balance. You’re probably going to continue your holiday spending after Thanksgiving weekend, too, so your credit card bill will likely exceed $407. Perhaps you spend $1,000 on that credit card — it would take you nearly five years to pay it off, making only $25 minimum payments, and you will have actually spent $1,434 in the end. It’s mind-boggling to think about how five more holiday seasons will come and go before you pay off 2014’s gifts, and you’ll probably owe even more, if you continue financing holiday spending on credit cards.

That’s just one example: You have to consider how your credit score factors into the true cost of your holiday spending. With a low credit score, your credit card interest rates may be higher — retail or rewards cards definitely have higher rates, so avoid carrying balances on them — meaning you’ll pay even more for those purchases, and it will take longer to pay off the credit card debt. In turn, high balances may keep your score low and jeopardize your ability to access other forms of credit at low rates. It’s a costly cycle.

Credit cards can be great tools for shoppers, but as you think about your holiday spending this year, make sure you know how you plan to pay for it and understand how it will impact your overall finances. You can get a good idea of how much your debt may cost you over your lifetime using this free calculator, which is a good way to keep your spending in check.