How to avoid racking up holiday debt

Before the Covid-19 pandemic, Sucheta Malik, an Indian expat in Dubai, and her family used to travel to three to four countries every year. Prudent budgeting and money management helped the family avoid costly debt after their overseas holidays, Ms Malik says. While the family didn't travel in 2020, they were able to take a short holiday this summer, she adds. One practice they always use is to first set a budget before deciding on the destination based on their funds. “I recently went on a budget holiday for eight days to Georgia because I am doing up my house in Dubai. So, we didn’t have a big budget to go on a lavish holiday. Also, because of the Covid-19 pandemic, we did not want to get stuck in European countries,” Ms Malik, who has been in Dubai for 10 years, says. Although the family does not set aside money for holidays in a separate account, they make a mental note of their yearly expenses, such as financial commitments in their home country, school fees and house repairs, among other things, before budgeting for a holiday. “Only when our finances are flexible do we spend lavishly on a holiday. For instance, we went on a big budget 15-day holiday to Switzerland in 2019 and spent about Dh50,000 [$13,600],” Ms Malik says. About 31 per cent of consumers took on debt to pay for holiday expenses last year , according to a MagnifyMoney survey that polled 1,171 Americans. Those who incurred holiday debt last year borrowed an average of $1,381. That’s up from $986 in 2015, an increase of nearly $400 – or 40 per cent. Credit cards are the most popular way to finance holiday purchases among those who took out debt. About 56 per cent of borrowers used credit cards for their holiday expenses, but 89 per cent of those who took on credit card debt admitted they did not pay it off within one month, the survey found. About 27 per cent of respondents said they paid for their holiday with a personal loan, up from 20 per cent in 2019, the poll revealed. Meanwhile, 37 per cent of respondents said they used buy-now-pay-later financing for at least one holiday purchase last year, according to MangnifyMoney. “With travel starting to open up, people are looking to spend time abroad with their families after what has been a tough year. However, racking up holiday debt remains a very real phenomenon,” Sophia Bhatti, a partner at financial advisory Hoxton Capital Management, says. Ms Malik uses her credit card for daily expenses during holidays, but their hotels and flights have been pre-booked and fully paid for. The family usually settles the credit card bills as soon as they return from the holiday. Occasionally, if it’s a large amount, they put it on a six-month equated monthly instalment payment, she says. “Flight tickets are always expensive on Fridays, so I try to book on a weekday, especially if we are travelling as a family when expenses add up,” Ms Malik says. “Airbnb works out cheaper compared with hotels although it comes with less facilities. Also, compare hotel rates on aggregator websites.” Ms Malik suggests taking out travel insurance to protect against lost passports and luggage or flight delays. She also recommends travellers get a prepaid travel card for public transport, especially in European countries because taxis are expensive. “It’s better to exchange currencies before you travel because withdrawing money from an ATM overseas involves high charges. Also, families travelling with infants should look to book half-board accommodation with breakfast and dinner included to save costs,” Ms Malik says. We spoke to personal finance experts who shared their top tips on how to avoid accumulating holiday debt. Search for deals and offers on everything from hotels, flights to car hire and even eating out, says Carol Glynn, founder of Conscious Finance Coaching. “It’s easy to budget for the big-ticket costs, such as flights and accommodation, but don’t forget car hire, eating out, taxis, travel insurance, shopping or gifts and excursions,” she says. Add it all up to ensure you can still afford it when you know the total cost and have a buffer for unexpected costs, such as taxes or unplanned excursions, Ms Glynn recommends. The most common form of holiday debt is almost always from credit cards due to overspending or underestimating the costs, she says. “For many, due to no planning at all, 100 per cent of the cost goes on their credit card. They will then pay the balance over many months after they return,” Ms Glynn says. It takes on average almost five months to pay that debt off, she says. This is an expensive way to manage costs as interest on unpaid credit card balances will increase the total cost of the holiday. It’s also not motivating or fun to be paying off a holiday five months after you return, she adds. “Create a watertight itinerary in terms of accommodation, trips and other expenses,” says Rupert Connor, a partner at Abacus Financial Consultants. “There are many different levels of accommodation, so try to find deals on Airbnb or even live life on the adventurous side by booking into a hostel for one or two nights.” Shop around and have an open mind, Ms Bhatti says. There are many deals, particularly as the travel industry looks to take full advantage of the recovery from the Covid-19 pandemic. “Most agencies offer packaged products, many at discounted rates currently. There are many budget-friendly destinations within a couple of hours’ flight from the UAE,” she adds. Airfares remain the most expensive cost on a holiday checklist. However, you can mitigate this cost by making use of air miles or flying with a budget airline, Ms Bhatti adds. Be savvy about the flights you book, says Mr Connor. Be aware of when airlines discount flights and also compare prices among airlines, he says. “Hotels account for the second-highest area of holiday expense. This can be mitigated to a further degree given the variety that exists and with sites such as Airbnb emerging,” Ms Bhatti says. If you go on holiday every summer, start saving for next summer as soon as you get back from your holiday, Ms Glynn recommends. “Total up what your last holiday cost and if you plan to do the same or similar next summer, divide the total by the number of months until you travel. Set that amount of money aside in a savings fund each month.” By doing this, you will have the cost of your next holiday in cash when it’s time to travel and so you significantly reduce the risk of needing to use credit cards or other forms of debt to pay for your holiday, Ms Glynn says. Cash should be the main form of payment for travellers overseas, according to experts. “Not all banks are equal, some charge an extortionate fee for overseas transactions and even where this may not be the case, the charges quickly rack up,” Ms Bhatti warns. It is usually very expensive to take out cash using an ATM outside of your country of residence. Holidaymakers should always exchange their spending money before travelling and only use those notes, according to Mr Connor. “Not only will you avoid building up credit card debt, but also dodge all those nasty international currency spreads,” he adds. There are many international banking services that allow you to transfer cash on what is essentially an international debit card, Ms Glynn explains. You can pick the currency you need, deposit cash to your account and use it to make your purchases without the expensive home bank charges and interest, she adds. “Alternatively, if you don’t want to carry a lot of cash or use an international card, transfer the cash you have budgeted to spend to your credit card in advance. Do not take out cash on your credit card. It’s very expensive as you will get charged a large transaction fee plus the interest rate charged on cash advances is higher than the standard rate,” Ms Glynn says. Ms Bhatti also suggests holidaymakers consider destinations that have a favourable exchange rate to the UAE dirham. “Sri Lanka has an exchange rate of 1 to 0.018. Currently, the Turkish lira is at a historic low, making it a popular destination for travellers,” she adds. It can be very expensive if you fall ill or have an accident in a country overseas. Therefore, experts highlight the need for holidaymakers to take out travel insurance. “Good travel insurance will protect you not just from the unknown cost of medical care but also many other incidents out of our control, such as lost luggage [you get an allowance for essentials and clothing], the cost of replacing lost documentation such as stolen passports, among other things,” Ms Glynn says. This is especially important at the moment as travel restrictions change regularly because of disruptions caused by Covid-19. If you need to change your plans at short notice, it’s very helpful to be able to get refunds on any bookings you made but can no longer use, according to Ms Glynn. “Being able to change dates will also prevent you from extra costs, such as losing your original flight due to change restrictions and having to book a new flight, significantly increasing your costs of travel,” she adds. The vast majority of personal finance advice is focused on helping maximise whatever limited money a person has. It is focused on frugality, cutting back and spending less, and does not acknowledge that money is limited only if you do not try to make more, Mr Connor says. “Therefore, if you want to enjoy your holiday, save harder, work harder and perhaps effect a side hustle to afford you that little bit extra while avoiding any debt. Is your house cluttered with items you no longer use? Make this an opportunity to clean up your house and earn extra cash selling these items online,” he suggests.

How to avoid racking up holiday debt

Create a reserve holiday fund, stick to your budget and only use cash when travelling overseas, finance experts say