Credit card debt being used for gifts, hurting retirement

Holiday spending is down amid the pandemic, but people are taking on more credit card debt to buy gifts, and that could hurt long-term and retirement savings goals.

While credit card debt is up across the board, people who suffered job losses this year have disproportionately been covering expenses with credit, according to a report today from LendEDU.

On average, 51% of people who remain unemployed because of COVID-19 are taking on additional credit card debt to pay for holiday expenses, LendEDU reported. That compares with 48% of people who were laid off but have since found employment and 33% of all people surveyed. The report is based on a Dec. 1 survey of 1,000 U.S. adults conducted by research firm Pollfish.

In a similar survey by LendEDU last year, about 20% of people said they were going further into debt to pay for holiday gifts.

So far this year, holiday spending has added an average of $1,822 to credit card balances among all respondents, compared with $2,374 for people who are out of work and $2,201 for those who were temporarily unemployed, the report noted. Those figures represent account balances that are not paid off monthly.

That is on top of non-holiday credit card debt people have amassed related to the pandemic of $2,150 on average, but $2,443 among those who have lost their jobs and remain unemployed, according to LendEDU. The total average credit card balance reported in the survey was $3,972 for all respondents and $4,817 among those who are out of work.

People generally have not indicated plans to spend more during the holiday season in 2020. Last month, a Gallup poll found that on average, people anticipated spending $852 for gifts, compared with $846 in the same survey a year prior.

Further, U.S. retail sales fell by 1.1% in November, according to a Commerce Department data cited today in a Reuters report.

EFFECT ON LONG-TERM SAVINGS

Rising credit card balances could hurt savings in two ways, Michael Brown, director of communications at LendEDU, said in an email.

“First, it could prevent consumers from ever building up long-term savings because they are constantly using their money to pay off credit card debt and pay for other, more immediate necessities,” Brown wrote. “Second, it could also destroy any savings that have already been built up, because consumers might end up using those savings to repay the credit card debt.”

Among those who are taking on debt for holiday expenses, 25% said they did so because of having no savings remaining, according to the recent report. Roughly another quarter said they were reserving savings for necessities, and another quarter said they were holding onto savings for emergency expenses.

WHAT ADVISERS SAY

“Clients are willing to spend more because they have saved money without commuting and spending on entertainment in 2020. They are looking to spend on family, namely children, that they have not seen in person all year,” Noah Damsky, principal of Marina Wealth Advisors, wrote in an email. Some, however, are using debt to pay for gifts, especially if they have recently depleted their savings on home purchases, Damsky said.

“I tell clients that it's important to replenish their emergency fund first and foremost, but when times are good … clients don't always see the need,” he said. “I do see this pattern as normal, unfortunately, and I think it will come at the expense of their long-term savings and retirement.”

Some clients who are well positioned are spending more in the holiday season, said Greg Klingler, director of Geba Wealth Management.

“I am seeing spending trend higher than past years, which seems to reflect additional time people can afford to [spend] online shopping as well as what feels like the purchase of more lavish presents as a substitute for the inability to enjoy the same familial interactions as usual,” Klingler wrote in an email.

Some advisers said their clients are showing restraint in holiday spending this year, rather than piling on debt. However, people who work with advisers are likely more financially secure than those who do not, and many are in professions less impacted by the pandemic.

With travel spending down, clients are more interested in charitable contributions this year, giving money to support first responders, food security, social justice and other areas, Marguerita Cheng, CEO of Blue Ocean Global Wealth, said in an email. And some have taken required minimum distributions this year in order to help family members or others in their communities, Cheng said.

Financial planner Michael Metzger said clients at his firm, Lifepoint Financial Design, are hesitant to spend.

“As a financial planner I try to give them the confidence that they can afford to spend a little money in giving to those closest to them, but I’ve had an overwhelming response that they want to save those funds for when they can actually travel and see their family and friends once again — one big celebration,” Metzger wrote. “Distanced giving has lost its luster at this point.”

Trips in 2021 are on millennials’ minds, Piertree Planning financial planner Treyton DeVore wrote. “Having a younger clientele, I’m starting to see people saving for experiences more than saving for purchases.”

This year, clients have focused on home improvement over less functional discretionary spending, said Dan Herron, principal of Elemental Wealth Advisors.

“For smaller purchases, holiday gifts are still being purchased, but not as many and not as expensive as prior years,” Herron wrote. “Even with the vaccine being distributed, I think people are still uncertain about the remainder of this year and next year.”

GRINCH WISDOM

“I come from Bulgaria, and growing up we only had cash — so unless you have the money for it, you just don't purchase it. I remind clients of this important fact, because buying something on a credit card and not paying it off in full results in about 26% APR which means their purchase price doubles approximately every three years,” wrote Tess Zigo, partner at Emerge Wealth Strategies.

People should prioritize quality over quantity, and that can mean giving more personal or handmade gifts, Judson Meinhart, manager of finanical planning at Parsec Financial, said in an email.

“Financial advisers unfortunately sometimes need to assume the role of the Christmas Grinch, where we need to counsel clients that their spending goals are beyond their means and are detrimental to their longer-term retirement goals,” Meinhart wrote.