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More and more Americans are struggling financially just as the peak shopping season takes over.
However, shoppers will continue to shell out an average of $1,455 on holiday gifts, in line with last year, according to a recent report.
Aside from how much you spend, the payment method you choose at checkout can go a long way in helping you save money and stay debt-free.
From credit cards to buy now, pay later, here’s a breakdown of some of the best ways to pay this Black Friday.
“The credit card is the gold standard in terms of rewards and buyer protection, but the interest rates are a huge drawback,” she said Ted Rossman, senior industry analyst at Bankrate and Creditcards.com. “The biggest thing I would worry about is debt.“
About 60% of Americans live from paycheck to paycheck through November. This can make paying with credit tempting, but there may be other options that are better suited to your financial needs.
“Get to know yourself,” Rossman said.
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Most Americans rely on credit for convenience as well as premiums and buyer protection programs. When it comes to holiday shopping, cashback or rewards cards offer an added bonus of 2% or more in certain categories.
“If you have multiple cards in your wallet, use the one that will give you the most value in exchange for the purchases you’re making,” said Elly Szymanski, assistant vice president of credit card products at the Navy Federal Credit Union. “For example, a card that lets you redeem rewards on your daily shopping for cash back, gift cards, or merchandise might be your best bet for holiday shopping.” (CNBC’s Select has a comprehensive roundup of the best holiday shopping cards.)
If you’ve already racked up rewards, now’s a good time to cash them in, Szymanski added. “With many families looking to spend less this holiday season, one of the best ways to save is to leverage the points and rewards you’ve accumulated over the year by using your credit card.”
However, credit card interest rates are at an all-time high and are only heading higher as the Federal Reserve hikes rates in an effort to curb high inflation. With annual percentage rates as high as 20% or even 30% on some retail cards, building up any credit card debt will come at a steep cost. (In debt? Follow these steps to reduce high-interest account balances.)
“Credit cards should only be used if you can pay them in full each month,” cautioned Chelsie Moore, director of wealth management solutions at Country Financial. “Use them as if the money came directly from your checking account.
“So if you see yourself spending beyond your budget, you may need to switch to using cash or a debit card,” Moore said.
Buy now, pay later
The ability to distribute an interest-free purchase offers a distinct advantage over credit cards. However, studies have also shown that hire-purchase could encourage consumers to spend more than they can afford. Also, some users say that making a return, which is essential when it comes to holiday gifts, could be more complicated using this payment method.
This season, more consumers will have the ability to buy now and pay later when shopping online at retailers like Objective, Walmart and Amazon, and many vendors also have browser extensions, which you can download and apply to any online purchase. Then there are the apps, which let you use installment payments even when buying things in person, just like you would with Apple Pay.
But for now BNPL loans are not subject to the same rules that apply to credit or debit cards and there are fewer purchases protections, including the ability to dispute a charge if you’ve purchased a good or service that hasn’t been delivered as promised.
Cash or debit card
Fewer and fewer consumers are using cash these days, but there could be some benefits when it comes to buying gifts, according to Rossman, including the ability to make a purchase for a loved one under the radar.
In addition, merchants are increasingly promoting cash transactions to avoid credit card transaction fees, so paying with cash can reduce the purchase price by about 3% in some cases.
“There has been a backlash over credit card processing fees,” Rossman said. “One of the levers that merchants pull is offering a cash discount.”
Rossman advises shoppers to do the math: The savings on the processing fee could exceed what your credit card offers in cashback rewards. “Especially if it’s a highly valuable item, that could really add up,” he said.
In addition to the potential savings, relying on cash or a debit card can help you stay on budget, other experts say. Hiding cash in an envelope for holiday gift shopping (or any other category of groceries) is an age-old trick to staying disciplined in your spending.
Just recently, the envelope budget method made a comeback on TikTok in the form of a “cash stuffing.”
Of course, you don’t need a real envelope.
“Some find it helpful to have multiple checking accounts with small amounts of money, so you can have dedicated debit cards for specific purposes,” Moore said.
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Apps like Apple Pay, Venmo, and Zelle work just like cash and are almost as easy to use, even Amazonia now offers Venmo (shoppers who connected their accounts before Nov. 18 got $10 credit to use on Black Friday).
But like BNPL, peer-to-peer payments come with varying degrees of consumer protection, which could also cause problems when it comes to getting a refund.
Trying to get the money back in your personal account after it’s been transferred to someone else may be more work than applying for a refund with a credit card company, which often reverses charges almost immediately and fights on your behalf.
“It’s kind of like putting toothpaste back in the tube,” Rossman said.
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