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Pay for your vacation
the American way -- with debt!
(Actually, you don't have to)
By Jay
MacDonald • Bankrate.com
 When
Americans set out on vacation, most of them head right for Debtsville,
U.S.A.
But you don't have to be one of them.
According to a May 2004 Summer Vacation survey
by Myvesta.org,
nearly 41 percent of us plan to take a vacation this summer and
over three-quarters of us (77.8 percent) will put the damage 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 12.79 percent, that can
turn a 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 $2,252. 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 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? The Bureau of
Economic Analysis reported that in April 2004 Americans saved only
2.4 percent of their income, albeit up from a recorded zero percent
a few years ago.
"We're really an instant gratification
society and people do think of vacations as an entitlement, a right,"
Leggett says. "The problem that you run into is there are also
responsibilities with those rights."
Myvesta found that over half of us plan to pay
off our vacation credit card balances as soon as the bill arrives.
"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 18 percent, if you paid just the minimum payment
for your $2,252 vacation, it would take you 33 years to pay it off
and cost you an additional $5,687 in interest, more than the cost
of the vacation itself. If you paid $200 a month, you'd close out
that bill just over a year at an additional cost of $234 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 fare. 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
$235 per day -- $110 for meals, $125 for lodging and about $1.93
per gallon for gas. Factor in snacks, 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 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."
-- Updated:
June 24, 2004
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