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Christmas clubs can help folks avoid debt trap during holidays

Sharon Caskey Hayes • Dec 22, 2007 at 12:00 AM

From left, Margaret, Jay, Linda and Kathleen McGuire wrap presents at their home recently. Linda McGuire is paying for presents this year with money she saved in a Christmas Club throughout the year. Ned Jilton II photo.


KINGSPORT — Last Christmas, Linda McGuire racked up the credit card debt, spending money she didn’t have on gifts for her family.

Not this year. The single mother of three opened a Christmas club account at her local financial institution last January, and contributed $50 each month through the year, plus extra money when she could.

“By November, I had a good little nest egg,” McGuire said. “I didn’t have to put anything on a credit card this year.”

Various banks and credit unions offer Christmas club accounts, which encourage members to save throughout the year for the holiday season.

Most Christmas clubs allow folks to open an account with a minimum amount — typically $5 — with no minimum deposits required. Account holders can add as much as they want, when they want. And many financial institutions offer payroll deductions, directly depositing money from your paycheck to the Christmas Club account.

Joe Garrison, regional manager for the nonprofit Consumer Credit Counseling Service of East Tennessee, said Christmas Club accounts are simply savings accounts — with one exception. Most Christmas clubs penalize members for withdrawing funds before a designated time — usually in October or early November.

“The early withdrawal penalty is fundamentally the only difference between the Christmas Club and a savings account. It makes you remember — that money is for Christmas,” Garrison said.

For McGuire, establishing the Christmas Club account just made sense. She overspent her limits last Christmas, and was inside Eastman Credit Union one day last January when she noticed a sign for the Christmas Club.

“I asked the teller about it and then went back and talked to somebody. She said they just take it out of your account and you never see it. I said, ‘Sign me up,’” said McGuire, a teacher at Central Heights Elementary School in Sullivan County.

She said the move not only helped her pay for this year’s holiday presents — it’s helping her move closer to a much greater goal.

“One of the things I want more than anything else in the world is a house. And this is a huge step toward that because I’m not spending $600, $700 that I don’t have on Christmas,” McGuire said.

She and her children — Jay, 14, and twin daughters Margaret and Kathleen, 13 — live with McGuire’s parents.

“I’m like everybody else — I don’t want my kids to go without. And when I first got divorced, I played the ‘he’s-not-going-to-outdo-me’ game. But I just can’t do that,” McGuire said.

“The Christmas Club — it’s worked out famously for me,” she said.

At Eastman Credit Union, Marketing Manager Connie Christian said the Christmas Club is a popular account.

“We have several thousand members currently using an ECU Christmas Club account,” Christian said. “Once people start using the account and see the benefits of regular saving, they usually stick with it. Christmas Club members even promote the account to others because they find it such a great benefit.”

ECU members can open a Christmas Club account for a minimum of $5, with no minimum deposits required. Automatic transfers can be set up from another ECU account to make saving more convenient, Christian said.

The member can choose the frequency and amount of the automatic transfer, she said.

This year, the average bi-weekly deposit at ECU was $30, which grows to about $800 for the year, once extraordinary dividends are included, Christian said.

“It just accumulates. There’s really no effort to it,” she said.

And at ECU, members can begin withdrawing Christmas Club funds without penalty as early as September, she said. Before that, the early withdrawal penalty is $10 per transaction.

Christian noted that Christmas Club money can be used for more than just holiday shopping. Some members use the funds to pay their property taxes, she said.

At Appalachian Community Federal Credit Union, Christmas Club accounts can be established for $5, and dividends are paid quarterly on the account. Payroll deduction is offered.

“A Christmas Club account can be opened at anytime during the year,” according to the Web site at Appalachian Community Federal Credit Union. Funds are automatically transferred to the member’s regular savings or checking account during the first week of October. And at Appalachian, there are no monthly service charges and no early withdrawal penalties.

Many banks also offer Christmas Club accounts.

At Bank of Tennessee, Cindy Cantrell, senior retail officer, said customers can open an account for $5, and can add to that amount whenever they want, however they want. Some customers prefer having the bank automatically deduct a set amount each month from another account at the bank. Other customers prefer making deposits in person. And other customers may have their company set up automatic payroll deduction.

Cantrell said a Christmas Club account can be much more doable for many people than other savings vehicles, such as a money market account or a certificate of deposit, which can require large sums of money as an initial deposit.

“That can be a bit overwhelming. But when you’re talking about starting this account with $5, and then saving $10 a week, that suddenly seems much more manageable,” Cantrell said.

At Bank of Tennessee, customers on average deposit about $45 twice a month. The average disbursement in October is about $1,000.

Back at Consumer Credit Counseling Service of East Tennessee, Garrison said Christmas Club accounts are a good way to save throughout the year for the holiday shopping season. But the idea comes too late for many shoppers this year.

Garrison said that credit card debt has more than tripled in the last two decades. And Christmas contributes to the load. He said his agency, which counsels folks in financial crisis, sees an increase in people seeking help every January and February — as the credit card bills from Christmas start piling up.

“People want to provide a wonderful Christmas for their family, and when emotions are involved, they tend to overstep the bounds of their financial situation,” Garrison said.

If you’ve overspent your limits this holiday season, Garrison recommends that you choose your financial health as a top New Year’s resolution. He said folks should balance their checkbook with each paycheck to make sure they’re not spending more than they make.

“Keep track of your bills, create a monthly budget, and prioritize your expenses and spending,” Garrison said.

“There is nothing wrong with wanting to give your family a wonderful Christmas. However, what is wrong is not to plan for it.”

He said if someone wants to spend $1,000 on Christmas gifts next year, he or she should set back a certain amount each month to achieve that goal. A Christmas Club account is one way to do that.

“It’s easier to put back $100 a month and have the money right before Christmas to go out and buy all the presents you want to buy to make it a wonderful Christmas,” Garrison said. “If you don’t have it, there’s one thing people are going to do — and that’s get the credit card out and say ‘I’ll pay for it later.’”

But what if that credit card debt becomes overwhelming, and you’re having difficulty making payments?

“Take action and get help,” Garrison said.

First, folks should know the signs when they’re in financial trouble.

“Recognize the early warning signs of debt trouble. If you start to get behind on things, then you know you need to sit down and redo your budget, because the budget that you had is not working,” Garrison said.

Second, contact your creditors and explain the situation.

“The worst thing you can do is sit down and say ‘I’m not going to be able to make this payment,’ and then don’t make it and don’t call them. They’re going to look at you as a person who doesn’t pay your bills. That’s when your interest rate goes up and it compounds,” he said.

An interest rate of 9 percent can jump to 25 percent or higher at that point, he said.

“Then I assure you, you’re not going to be able to pay off that debt,” Garrison said.

“You have to talk to the creditors. They would rather work with you than have you file bankruptcy.”

Above all, Garrison said, pay your mortgage first. Especially in today’s market, with so many sub-prime mortgage defaults and foreclosures, folks should make their home the top priority, he said.

“It’s not good to be in debt and it’s not good to not pay your creditors. But if you sit down this month and choose not to pay someone, do not let it be your mortgage company,” Garrison said.

For help, call the Consumer Credit Counseling Service of East Tennessee at 1-800-251-CCCS, or visit its Web site at www.cccsinc.org.

The organization operates offices in Johnson City, Knoxville and Maryville, serving a 49-county area throughout the eastern half of Tennessee.

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