Borrowing for the 2022 Holiday Season Could Cost You More Than Ever

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  • Many people borrow for holiday gifts.
  • This could be more expensive this year since the Federal Reserve keeps raising interest rates.

Don't borrow for holiday gifts without reading this.

The holiday season can be an expensive time of year. Many people have entertaining costs to cover as well as gifts to buy.

Ideally, you'll save up for these expenses throughout the year so you'll have cash available to cover them. But not everyone is able to make that happen. And if you're committed to giving your loved ones a memorable holiday season despite a budget shortfall, you may be considering borrowing some money to make things festive.

Before you borrow, though, you need to be aware that you could face higher financing charges than usual this year. Here's why.

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The cost of credit could be a lot more expensive this year

There's a very simple reason why borrowing could be more expensive this year. The Federal Reserve (America's central bank) has repeatedly raised interest rates over the course of the past year.

The Fed sets a benchmark rate, which is the rate banks pay to borrow from each other overnight. During the COVID-19 crisis, this rate was set near 0%. But, the Fed has been raising rates to help fight surging inflation and, as a result, the new benchmark rate is now 3.75% to 4%.

When the Fed raises rates, many lenders pass extra borrowing costs on and raise the rates that consumers pay for personal loans. Personal loans are traditionally one of the more affordable ways to borrow for the holidays because they typically have lower interest rates than credit cards and their repayment schedule is more predictable.

Variable-rate loans also see their rates rise when the Fed raises rates (especially as many types of variable-rate debt are tied directly to this prime rate which is tied to the federal funds rate. Since most credit cards have variable interest rates, that means the Fed raising rates is going to make borrowing on a credit card costlier too.

Should you still borrow for the holidays?

Borrowing for the holidays is never the best idea since you'll be impacting your budget flexibility going forward and making all of your holiday purchases more expensive due to interest. Since financing charges will be higher this year, it's even less ideal to borrow. If there is any way to avoid it, such as by scaling down your expectations or by picking up some extra hours to save for festive spending, you should typically aim to do that.

Of course, sometimes there really isn't money available and you really want to give your loved ones (and especially kids) a good holiday anyway. If you find yourself in a position where you feel that you must borrow, aim to look for options that will help you keep costs down. A 0% APR credit card that charges no interest on purchases for a set time (such as 12 months) could allow you to pay over time for the holidays without spending a small fortune in interest.

Ideally, if you have to borrow this year, you can also work on making a plan to pay off what you owe ASAP if you get stuck paying at a higher rate. The sooner you retire your holiday debt, the less the impact of rising interest rates will have on your financial future.

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