What's the Best Way to Finance Your Holiday Purchases?

Before you start making purchases, give this list a quick review.

Deciding what to get everyone on your holiday list can be challenging, but once that's done, you have another important decision to make: How are you going to pay for it? Most people have a few choices, but it isn't always obvious which is the best option. Below, I'll explain the pros and cons of shopping with cash, credit, credit card rewards, and layaway programs this holiday season so you can decide which is right for you.

Cash

There are two key benefits to using cash over the other payment methods listed here. First, when you buy something with cash, it's yours free and clear. You don't have to worry about making future payments or racking up debt like you do on a credit card. Using cash also makes you more aware of how much you're spending. This can prevent you from going over your budget.

But we all only have so much cash in our bank accounts, and you may not have as much as you need to make all of your purchases right now. This can make a credit card or layaway program more appealing. And, of course, you can't use cash to shop online. You could use a debit card, but this could expose your bank account to identity thieves if someone hacks your online shopping account.

Credit cards

Credit cards are a more secure option for online shopping and, depending on the card, you can earn rewards to put toward future holiday purchases or maybe even a nice gift for yourself. Plus, you don't need to have the money to pay for all your purchases right away to buy them now.

But if you can't afford to pay your bill in full at the end of the month, your balance will begin to accrue debt and that could cause serious, long-term financial problems. To avoid this, keep a close eye on how much you're spending each month and limit yourself to only what you know you can afford to pay back.

Credit card rewards

Credit card rewards can help you purchase some of your holiday gifts essentially for free, and if your credit card offers gift cards, these could turn into gifts themselves. If you're not sure how many rewards points you have right now, log into your online credit card account to find out.

But rewards points might not always be an option for funding your holiday purchases. They may not always line up with the gifts you hope to buy either. A cash back card is your best option for paying for holiday purchases, but think carefully about how you're going to use those rewards. Your points may go further if you spend them on gift cards rather than straight cash back.

Layaway programs

Many major retailers offer layaway programs to help people pay for their holiday gifts over time without taking on debt. You go to the store, fill your cart with the items you want, and take it to the layaway desk to be held for you. Then, you make regular payments, and when you've paid for your items in full, you can take them home.

It's a nice alternative to credit cards for those who are worried about debt, but you should be prepared to make some type of a down payment and ask about any fees associated with the layaway program. Not all stores allow layaway, either, so you may not be able to do this for all of your purchases.

Most people will probably use a combination of the above payment methods to do their holiday shopping, and that's just fine. But whichever options you choose, make sure you understand their pros and cons and keep an eye on how much you're spending so you don't go over your budget.