Are layaway plans or credit cards better for saving money?

The holiday season often leaves people a little rosier, plumper and, unfortunately, poorer. The average American will spend $832.36 on holiday shopping in 2008, and the bulk of that tab can piggyback on your finances into the next year. Shelling out nearly a grand for an assortment of sweaters, DVDs and animatronic dolls for friends and family leaves many starting January in economic doldrums. No wonder getting out of debt is one of the most common New Year's resolutions.

That steep sum for holiday expenses is actually a reflection of scaling back rather than indulging. The National Retail Federation's annual survey found that consumers have their eyes peeled for bargains during the holidays. The Federal Trade Commission also recommends that budget-conscious shoppers stick to lists, seek out sales and stay focused to avoid breaking the bank. How you pay for the items on that list can also trim down the spending.

For starters, ditch the plastic. In 2006, Americans charged an estimated $135 billion to credit cards during the holidays, with individuals putting more than $600 on their cards [source: Lim]. Carrying cash could reduce that figure. Compared to paying with cash, you're prone to spend up to a third more with credit cards [source: Lim]. Studies have found that credit cards boost people's "willingness to pay" for pricey items [source: Prelec and Simester]. Handing over cash, on the other hand, reins in your urge to splurge because it's a more tangible experience -- you can see and feel your money being spent [source: LiveScience].

Cash isn't always a viable option, especially in an aching economy. You may want to buy a child a new 10-speed bicycle, but you don't have the $200 for it in your wallet. To relieve cash-strapped consumers, several chain stores have brought back a blast from the past for the 2008 holiday season. Little Johnny wants that bike, but you don't have the money? Put it on layaway.

Layaway Pros and Cons

Merchants started offering layaway plans during the Great Depression. When people didn't have enough cash on hand to purchase something, they could pay for it bit by bit. As credit cards became more popular in the 1980s and '90s, they largely replaced layaway. A swipe of plastic gave consumers the satisfaction of taking their coveted item home that day while delaying the actual payment. With credit growing scarce and more people attempting to dig their way out of debt, some consumers are eschewing credit cards. To reach out to financially ailing customers and to bring in more revenue, some stores have revived layaway plans.

What's involved in a layaway transaction? Here's how a sample layaway plan might work:

Pick out your merchandise and take it to the layaway department.
Shell out a down payment, which is usually around 10 percent of the purchase price.
Pay a layaway fee. This fee is often a minimal, flat-rate charge.
Select the length of your layaway plan -- divided weekly, biweekly or monthly. Most layaway plans last no longer than a year.
Make your scheduled payments for the remaining balance of the item.
Once you've completed the plan and reached a $0 balance, you pick up the merchandise from the store and take it home.

Be sure you understand the store's refund policies before you put something on layaway. Some businesses include cancellation fees in their layaway plans. And when you cancel your plan, stores may refund all of your money, keep a portion of it or offer you store credit for the amount.

Aside from the lack of instant gratification, layaway can be helpful for people with debt or credit problems. First, layaway plans don't involve interest. Aside from any layaway or cancellation fees, you won't pay much more than the retail value of the merchandise. Also, if you default on your layaway payments, it won't mar your credit score.

But layaway requires planning, which can be a hassle during the holidays. For instance, Kmart (one of the corporate leaders in the layaway revival) has advertised a new eight-week layaway payment plan. To get those presents under the Christmas tree, you must have put gifts on layaway by late October. That's well before retailers start skimming prices in earnest for Black Friday (the Friday after Thanksgiving). In addition to planning ahead for possible layaway items, you may want to check into holiday discounts. There's a chance that a pricey gadget could cost less closer to Christmas, which could save you more than putting it on layaway. Or check ahead to find out if the store honors sale prices for layaway items.

What if you have a last-minute purchase that leaves no room for the layaway delay? Is it time to pull out the plastic? Unless you can pay your credit card balance before interest accrues, try to avoid it. Just think about this: The average American will spend $832 on holiday shopping in 2008. If you charge that amount on a credit card with a 10 percent interest rate and make minimum monthly payments of $20, it will take you 50 months to pay it off. To compound the problem, you'll have to muddle through four more Christmas seasons without getting deeper in the hole.

The recipe for lean holiday spending is simple: cash mixed with patience and planning. Otherwise, you may need a lot more endurance to wait for your credit card bill to slim down.

Are layaway plans or credit cards better for saving money?

Layaway Pros and Cons

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