COVID-19 Brings Holiday Debt to 6-year High: What This Means for You in 2021
To put it mildly, 2020 was a year that many of us would like to forget. From a financial standpoint, the U.S. economy has taken quite a few hits from the COVID-19 pandemic, particularly in the job market. And according to this InsuranceJournal, the impact might be felt for the next two years.
To compensate for the upheaval the pandemic caused in our lives for most of 2020, many Americans chose to spend more on holiday spending this year than in the last five years.
Consumer spending increased 40% this past holiday season
According to a new survey conducted by MagnifyMoney, around one-third of the 1,171 consumers polled took on debt to pay for holiday expenses last year, spending an average of $1,381. Since this survey’s start in 2015, that’s a 40% increase, up nearly $400 from the $986 total holiday spending consumers did per person five years ago.
“The pandemic has wrecked so many things for so many people, canceling birthday parties, vacations, family get-togethers and more,” said Lending Tree’s chief lending analyst, Matt Schulz, “Now, many people are likely trying to overdo it a bit for Christmas to make up for acrummy year. It’s easy to understand, but that spending can really clobber your budget.”
Fewer people are borrowing, but those who do, borrow more
COVID has financially devastated many members of the American working-class population, but for a lot of the nation’s wealthier citizens, it has either affected them slightly or has even helped them thrive financially. According to the survey, this means that though fewer people are borrowing money, those who have been—mainly Millenials and parents of young children—are borrowing more.
What does this kind of borrowing mean? The people who are thriving are more comfortable taking out larger loans for home projects and similar tasks, and they’re not worried about accruing some interest because they know they can pay it off. But for millions of others who are experiencing massive financial problems, they’re borrowing because they don’t have much—if any—income coming in.
Other key findings
- Credit cards were the most popular way to finance this past holiday season among those who took out debt. Fifty-six percent of borrowers used plastic, and 89% of those with new debt from the holidays won’t pay it off within one month, which could mean high interest charges for those who used credit cards.
- Nearly 4 in 10 of all Americans surveyed used “buy now, pay later” financing for at least one holiday purchase in 2020, most of them younger people.
- Most consumers (66%) who borrowed money for the holidays are stressed about their debt, most of them were parents with young children and millennials, at 73%.
Americans are taking out more personal loans
Another key finding in the study shows that more Americans are taking out personal loans to cover their holiday spending. Twenty-seven percent of those who were surveyed took out personal loans over credit cards, an increase of 20% from 2019. But credit cards still reign supreme, with 56% respondents using them. And 18% of those who borrowed money financed their holiday spending with a payday or title loan, which is up from 11% last year. And a fifth took on debt using a store credit card.
Personal loans are booming as an alternative to credit cards, according to Schulz, who says, “They’re a good, simple option for folks who want to finance a purchase but don’t want to mess with a credit card.”
Personal loans can also be a cheaper alternative to credit cards for many borrowers because they have fixed APRs and are repaid in fixed regular installments, with a repayment schedule that can often be customized to suit the convenience of the customer.
Though, it should be noted, the best advice overall is still to budget your money and save ahead of time for your holiday shopping to avoid paying finance charges and interest.
Getting out of debt in the new year
According to the MagnifyMoney survey, Americans’ most popular financial resolution for 2021 is to get out of debt. But, most consumers will most likely not do it. Less than 2 in 5 consumers with holiday debt will try to consolidate their debt or shop around for a good balance transfer rate. The most common reason, according to the survey, is that most people didn’t want to deal with another bank.
Most consumers with holiday debt won’t be able to pay it off within a month
Eight-nine percent of people who borrowed money for holiday shopping won’t be able to pay off that debt within 30 days, according to the survey, particularly credit card users. And they’ll most likely pay interest because they’ll be carrying a balance from month to month.
Schulz says, ‘That’s an awful lot of people carrying over balances for a while. That tells me that these folks aren’t just taking on debt for convenience’s sake or to run up rewards. They’re doing it because they don’t have any choice.”
Of those consumers with new holiday debt, 18% said they only plan on making minimum payments on it. That would take more than five years to pay off $1,000 making $31 monthly payments with an interest of 14.5%. Interest alone on that would be $600.
We’ll be interviewing Matt Schulz in an upcoming blog post to further discuss the results of this year’s MagnifyMoney survey. We’ll also talk about tips on ways you can start budgeting for the next holiday shopping and ways you can use personal loans to your advantage. You don’t want to miss it.