As holiday shopping season ramps up, American consumers are on the hunt for deals: According to the National Retail Federation, sales and discounts are the #1 factor in shoppers’ decisions about where to spend their money.
According to our 2018 survey, consumers who said they shopped sales to control their holiday spending were on average 50 percent more likely to say they overspent on the holidays than those who did not shop sales. Among consumers with non-prime (below 700) credit scores, sale-shoppers were 62 percent more likely to have overspent. Although counterintuitive, these findings are consistent with data from 2017, which revealed the same trend.
Save More, Spend More?
Why would consumers who make an effort to shop for discounts end up spending more money? Possible reasons include that they simply spend more time shopping, which leads to buying more stuff; or that they may think of money saved on discounted items as extra cash in their pockets that then enables them to make more purchases. Moreover, savvy retailers use a variety of tactics to encourage spending, from creating an “illusion of scarcity” that urges shoppers to snap up a good deal before it’s gone, to displaying an “anchor” price highlighting how big a markdown they’re offering on a product.
No matter the reason for it, overspending on holiday shopping can place further strain on already-tight finances, especially for consumers with non-prime credit scores. For instance: almost 60 percent of non-prime consumers reported experiencing an unexpected expense during the holidays (examples include a car repair [24 percent], unexpected high utility bill [22 percent], or non-routine medical expense [12 percent]). Previous research from the Center for New Middle class indicates that such expenses present hardships for many non-prime Americans; on average, they report they could not weather an unexpected expense of more than 31 percent of their monthly income.
Given these findings, perhaps it’s not surprising that one-third of consumers with non-prime credit scores incurred holiday debt–an outcome that could hinder their ability to raise their scores and secure brighter financial futures. Those who experienced unexpected expenses during the holidays were twice as likely to take on new debt.
The Best Defense Against Overspending
Last but not least, the survey revealed a simple yet powerful tool for avoiding holiday financial pitfalls: a budget.
Among non-prime holiday shoppers, those who established budgets (as opposed to simply planning where to shop or what to buy) were less likely to overspend[RF2] . Non-prime consumers who only planned were 61 percent more likely to have overspent than those who went a step further and employed budgeting. In addition, those who budgeted strictly were 56 percent more likely to have said their finances actually improved after the holidays–an outcome arguably more valuable than any shiny new gift.