Dollars+Sense: Acting now can prevent holiday debt hangover next year

Unlike most of us, Anthony Kaczor of Minneapolis doesn't dread opening his January credit card statements. The man credit card companies love to hate opened a Christmas club account last April and was able to write checks or pay cash for gifts instead of charging them. He's already starting to save for Christmas 2008 and hopes to have about $700 by October.

"My wife's birthday is in January so I can save for both without going deep into debt," he said.

The quaint, modest accounts that went the way of passbook savings in the 1980s are enjoying a resurgence at many credit unions and some banks. In 2006, officials at TCF noticed that people who were getting into financial trouble with their holiday spending started asking about Christmas club accounts, which faded when credit card use exploded. In 2007, the bank opened thousands of holiday accounts, especially for customers in their 20s and 30s, said Sarah Lee Evers, executive vice president of retail banking at TCF.

The number of holiday accounts at Twin City Co-ops is growing 10 percent each year, said Casey Carlson, director of marketing at the co-op. Any resident of Minnesota or Wisconsin can join Twin City Co-ops, he said.

Call it retro banking. It's a little different than an ordinary savings account or money market. Holiday accounts have a psychological edge. Account holders are encouraged to have the money automatically withdrawn from a paycheck or checking account on a weekly, biweekly or monthly basis. Like other types of withholding "taxes," what you don't see, you're not likely to miss.

Customers can add to the accounts throughout the year in addition to making automatic deposits.

Withdraw money early and the bank plays its "shame on you" card. Twin City Co-ops credit union will close the account and take away the interest upon any withdrawal. TCF doesn't allow withdrawals, but the money can be accessed by closing the account.

Consumers say one thing, do another

There's a clear need. Once again, despite consumers' best intentions, personal debt continues to rise. In the 2007 holiday season, Americans spent about $816 for holiday gifts, according to the National Retail Federation, or about $1,632 per two-earner household. If a cardholder had charged that amount and paid $40 each month at 18 percent interest, it would take five years and two months to repay it and the $861 in interest.

Despite a poll by the Financial Services Roundtable saying that more than half of consumers planned to use cash or debit cards for Christmas purchases in 2007, credit delinquencies continue to rise, said Gerri Detweiler, a credit advisor for Credit.com. "Now is a good time to be opening a holiday account, even if it's only $5 a paycheck," said Detweiler.

Some skeptics argue that no one deep in debt should open a savings account until they pay off credit card balances that carry 18 to 20 percent interest rates. Mary Hunt disagrees. The "Everyday Cheapskate" columnist (www.cheapskatemonthly.com), who successfully eliminated her own personal $100,000 debt, said that people still need to make provisions for next Christmas unless they've agreed to stop celebrating it with gifts.

Make the same payment amount on the credit card each month until it's paid off, she advises. If that's $43 a month, keep doing it. If the next month's minimum is $41, keep paying $43. But don't throw every nickel toward your debt, or you'll have no emergency fund when life throws you a curve ball, Hunt said.

John Ewoldt • 612-673-7633 or jewoldt@startribune.com.