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The Best Way to Pay for Your Holiday Shopping

By Nicole Seghetti - Nov 21, 2012 at 11:01AM

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Believe it or not, it's plastic.

The holiday shopping season is officially here. Retailers have decked their aisles with holiday goods, and consumers are making their lists and price shopping twice. But while bargain hunters spend a lot of time searching for rock-bottom prices, it doesn't matter how cheaply you buy a bundle of gifts if you don't pay for them responsibly. So before you don your favorite Christmas sweater, brave the frenzied crowds, and take a few elbows fighting for the best deals, figure out how you'll pay for your holiday goodies.

Big business getting bigger
According to the 2012 Discover Annual Holiday Shopping Survey , shoppers plan to spend about $100 more this holiday season than last year. The average consumer will fork over $838 this year, up from $748 in 2011. Of the 1,000 adult consumers surveyed, half say they plan to spend about the same as they did in 2011, and 23% plan to spend more this year.

Many shoppers will rely on debit cards and cash, but roughly 29% will use credit cards to charge holiday purchases. And, used responsibly, plastic can be your best alternative.

Here are some ways to pay for your holiday finds this shopping season.

Cold hard cash
Obviously, the best way to pay for holiday gifts is with cash. This is especially true if you have poor credit or can't pay off your credit card balance in full the same month the bill arrives. So peel off the Benjamins instead of relying on credit cards if you aren't disciplined with plastic.

Thanks to the Great Recession and credit tightening, layaway has made a comeback in recent years. Layaway is when you buy something in installments. You put money down, and the retailer holds the item for you rather than selling it. Then you pay off the item in installments, and when you're done, it's yours. It doesn't require you to take out credit, so it isn't a loan and won't hurt your credit score. But layaway fees are steep, typically 2% to 8% of the item's cost. And if you bail on your purchase, you'll eat the fees.

A swipe of plastic
Credit cards only get you into trouble when you don't pay them back on time and in full. If you have no doubt that you can pay the entire balance shortly after the New Year's champagne has fizzled out, then have at it. But if you can't pay back in full, use cash, consider layaway, or restrain yourself from making the purchase altogether.

If you can responsibly use plastic, here are three ways to reap extra benefits.

1. 0% APR credit cards
Several credit cards incentivize by offering a 0% APR introductory period. Usually, taking advantage of that period can be risky. After all, when the period ends, your interest rate will shoot through the roof. But if you know exactly how long you have before your card starts accruing interest, you can use that time to pay it off entirely. Just make sure you're diligent and disciplined. For example, Citigroup's ( C 0.61% ) Citi Diamond Preferred Card offers a 0% introductory APR for 18 months, and the card boasts no annual fee. 

2. Retailer credit cards
Store credit cards can really work in your favor if you're a loyal one-stop-shopper. For instance, troubled retailer J.C. Penney (NYSE: JCP) offers its Store Card, which rewards users up to 20% off items like apparel, shoes, handbags, and fashion jewelry and 10% off fine jewelry, watches, and home goods.  The catch? Items must be purchased the same day as card approval. 

3. Cards with rewards
You're spending more money during the holidays, so why not get rewarded for doing so? The most popular credit card rewards can be redeemed for travel or cash back.

For travel rewards, consumers continually highly rate Capital One Financial's ( COF 1.81% ) Venture card. With no annual fee for the first year, the card offers generous miles on purchases and 10,000 bonus miles when you spend $1,000 within the first three months. You can fly on any airline at any time with no blackout dates. Better yet, there's no limit on the miles you can earn, and miles don't expire.

If you prefer cash rewards, Discover Financial Services' ( DFS 2.22% ) Discover card offers a 5% bonus for department store and online shopping through the end of the year. And JPMorgan Chase's ( JPM 1.50% ) Chase Freedom  card is chock-full of cash rewards, including 1% cash back on all purchases. It also bestows you 5% back on categories that rotate every three months, with this quarter's focus being hotels and airlines. The Chase Freedom card also grants 10% cash back when you shop online at select merchants.

In fact, 35% of shoppers will use their already accrued credit card rewards to supplement their holiday shopping this season. So the cash rewards you rack up this year can be used for next year's holiday purchases.

Foolish bottom line
The gift of financial sanity is the best present you can give yourself this holiday season. Sure, it's not as fun or flashy as that constantly-daydreamed-about item on your list to Santa. But it's a gift that'll last long after you've packed up the holiday decorations and sweated off the holiday pounds.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

JPMorgan Chase & Co. Stock Quote
JPMorgan Chase & Co.
$162.57 (1.50%) $2.41
Citigroup Inc. Stock Quote
Citigroup Inc.
$62.90 (0.61%) $0.38
J. C. Penney Company, Inc. Stock Quote
J. C. Penney Company, Inc.
Capital One Financial Corporation Stock Quote
Capital One Financial Corporation
$148.58 (1.81%) $2.64
Discover Financial Services Stock Quote
Discover Financial Services
$114.38 (2.22%) $2.48

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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