Pay for your vacation the American way --
with debt! (Actually, you don't have to)
By Jay MacDonald • Bankrate.com

June 14, 2000 -- When Americans set out on vacation this summer, most of them will be heading for Debtsville, U.S.A.

But you don't have to be one of them.

According to a May survey by Myvesta.org (formerly the nonprofit Debt Counselors of America), 55 percent of us plan to take a vacation this summer and nearly three-quarters of us (73.6 percent) will put it on our credit cards.

And why not? Credit cards are a great way to travel. They're safer than cash, more convenient than traveler's checks and accepted just about everywhere. The problem with the fly-now, pay-later approach is, try as we might, most of us will take months, even years, to pay off that summer safari.    

Ball and chain
And at an average interest rate of, say 17.99 percent, that can turn a summer getaway into a very costly financial ball and chain, according to Keith Leggett, senior economist for the American Bankers Association.

"In the Federal Reserve's Survey of Consumer Finances, they ask questions such as, 'Do you think it's OK to use debt to finance vacations?' and people say, 'Yes, that's fine,'" says Leggett. "What that reflects is a willingness to accept more debt, but it may also be an indicator of people who are going to be more financially stressed."

Simply put, we vacation above our means, according to Mike Kidwell, vice president and co-founder of Myvesta.org. "We found that the average summer vacation will cost $2,274, about 8 percent of the average annual income of $27,219."

How much of a bite is this going to take out of the average yearly income? Basically, you've got to work a month, or 22 working days, just to have a week's worth of fun.    

Life, liberty and vacations
Few would begrudge Americans the right to a summer vacation. At issue is how we pay for it. As recently as 30 years ago, before credit cards were ubiquitous, most of us saved for a trip and paid with cash or traveler's checks on the road. If you ran out of money, you came home, simple as that. Today, with credit cards as our magic carpet, we spend more than we should.

As for saving ahead? Last year, according to Leggett, Americans saved roughly 0 percent, one of the lowest rates of personal saving in the world. "We're really an instant gratification society and people do think of vacations as an entitlement, a right," he says. "The problem that you run into is there are also responsibilities with those rights."

Myvesta found that half of us (56.7 percent) plan to pay off our vacation credit card balances as soon as the bill arrives, a third of us (35 percent) within 12 months.

"For many people, that's wishful thinking," Kidwell says. "Too often, people pay just the minimum payment, not realizing how much the interest will add to the total cost of a vacation."

How out of control can it get? At an average interest rate of 17.99 percent, if you paid just the minimum payment for your $2,274 vacation, it would take you 34 years to pay it off and cost you an additional $5,974 in interest, more than twice the cost of the vacation itself. If you paid $208 a month, you'd close out that bill in a year at an additional cost of $227 in interest.  

Plan first, relax later
How do you go on vacation without ending up in the poorhouse? Budget, that's how. "Be realistic. Don't fool yourself. Set a budget," Leggett advises. "Generally speaking, people end up acquiring debt when they don't plan. A lot of people underestimate the actual debt they have on their credit cards."

Kidwell concurs: "You do need to plan ahead. Try to find the great deals at hotels, on air fares. If you know where you're going, you can save a tremendous amount of money just by planning ahead. What we find is the people who plan their vacation at the last minute handle their finances the same way."

Besides, what's the point in finding all those travel bargains on the Internet if all the money you saved goes toward finance charges on your credit cards? Planning ahead will not only get you the best rates on air fare and accommodations, it will also give you a start on your vacation budget.

According to the American Automobile Association, a family of four should budget at least $225 per day -- $100 for meals, $110 for lodging and $11 per 100 miles of automobile travel costs. Factor in entertainment, equipment rentals and incidentals, and you'll know what your vacation will cost before you go, in plenty of time to start saving for it. Some simple savings strategies with certificates of deposit and money market accounts can build a vacation nest egg surprisingly quickly.

This will keep your capital safe but build it much, much faster than a simple savings account or holiday club account. Families might work together toward a vacation fund by coming up with creative ways to save.

Post a vacation thermometer in the kitchen and fill it in as the fund grows. Wage earners might arrange for an automatic deposit into a vacation account at their bank.  

Vacation now, pay now
Once you're on the road, Leggett recommends adopting a pay-as-you-go philosophy. "You can use your debit card in ATMs and point-of-sale all over the country now. They can help keep your debt under control," he says. "ATMs themselves are also a good idea. You can always access them and get cash. Even with a surcharge, they're still better than incurring a (credit card) finance charge."

One exception: Overseas, using a credit card can get you better exchange rate deals.

Check with your credit card issuer, and at the same time be sure you know what additional fees, if any, they charge for foreign transactions.

ATM cards also offer you some of the best exchange rates overseas, but check before you go to be sure how fees and surcharges are applied with your card.

Still coming up short? Borrowing on a home-equity loan can leave you repaying yourself at a better interest rate than the credit card company offers you. And of course you'll have the advantages of using a loan that is generally tax deductible.

Whatever you do, says Kidwell, try to pay that credit card off before your tan fades.

"Years from now, look at your family photo album to have fond memories of your vacation -- not your credit card statements."

Jay MacDonald is a contributing editor based in Florida
To comment on this story, please e-mail the Bankrate.com editors

-- Posted: June 14, 2000