4 Smart Ways to Finance Your Holiday Purchases -- and 2 to Avoid

The choice you make could affect you long after the holidays.

If the Christmas music stores have been playing for the last month isn't warning enough, the holiday season is nearly upon us. That means we only have a few short weeks left to purchase all the gifts on our list. That's challenging on its own, but then you also have to decide how you're going to finance all these purchases.

What you choose could affect your finances long after we ring in the new year, so you need to weigh all your options carefully. Here are four financing options you may want to consider and two you should probably stay away from.

Four smart ways to pay for holiday purchases

These strategies should be your go-to options for holiday purchases:

1. Saving up over time

Make a list of all the gifts you plan to buy and their costs. If that works out to a lot more than you can afford, set a holiday budget and decide how much you can allocate to each person on your list.

Once you have a savings target, try to set aside a little extra money each week until you reach your goal. You may have to make some changes to your budget, like cutting back on dining out or discretionary purchases for yourself, to make that happen.

2. Layaway

Many department stores and some online retailers offer layaway services. This is where you pick out the items you want and pay a small percentage down. Then, you make regular payments over time, and when you've paid for everything, you can take the items home.

Not all retailers allow layaway, and those that do may have different terms regarding how much you have to pay down and how quickly you have to pay the full balance off. So it's a good idea to inquire about terms at the store you're buying from before deciding if this is right for you.

3. Buy Now, Pay Later services

Buy Now, Pay Later (BNPL) services are similar to layaway, except you get to take the item home before you've finished paying for it. You still have to put some money down and make regular payments until you've paid it all off.

If you choose this route, be careful not to spend more than you planned. When you're only putting a small amount down, that can tempt you into overspending, and then you may not be able to keep up with the bills later.

4. Rewards credit card

Credit cards are a safe way to shop online and rewards credit cards enable you to earn gift cards you can put toward future purchases. Or you can put the points you earn toward your next credit card bill to reduce how much you owe.

But if you plan to do this, you should only charge as much to the card as you feel confident that you can pay back at the end of the month.

Two financing options to avoid

Using one of these strategies to pay for your holiday gifts could come back to bite you in the long run:

1. Payday loans

Payday loans offer quick cash and have pretty low eligibility requirements. But they also have extremely high interest rates. If you aren't able to pay your balance back in full by the end of the loan term, you could wind up in a debt spiral that haunts you long after the holiday season.

2. Rewards credit cards if you can't pay back your balance in full

Credit card interest rates aren't as high as payday loan interest rates, but they can still be over 20%. If you fail to pay your balance in full at the end of the month, the remainder will begin accruing interest and you'll pay a lot more for it in the long run.

You can use a combination of the strategies listed above to pay for your holiday gifts. But whenever possible, try to avoid borrowing money. Even if you have every intention of paying it back on time, you never know what other costs might come up in the meantime. If you pay for everything out of your own savings, you won't have to worry about late fees or creditors coming after you.