Climbing out of holiday credit hole. Fading tax break adds to cost of debt

Now that the Christmas wrapping has been bagged, trashed, or burned, the problem of how to pay for all those gifts is facing many people who shopped with their credit cards. The bills probably haven't arrived yet, but when they do, they will add a little (or a lot) more to the debt burden that is overwhelming many Americans. For them, the problem now is climbing out of that debt, to put themselves on a sounder financial footing and to save on taxes.

On the tax front, the deductibility of interest for personal debt (except mortgages) is continuing to shrink. For 1988, only 40 percent of this interest can be deducted. Next year, it will be 20 percent, then goes to 10 percent in 1990, and to zero in 1991. So the less interest you have going into 1989, the less costly it will be at tax-filing time.

On the personal finance front, any money not being used to pay down debt or the interest on that debt can be used for savings, investment, or next year's Christmas presents.

For the most part, people have shown some restraint in their use of credit this year, says Robert Johnson, a professor of management and director of Purdue University's Credit Research Center. For the 12 months ending Oct. 31, total consumer debt increased 8.2 percent, compared with 13.1 percent for the same period ended Oct. 31, 1986.

``Consumers are remarkably good about managing their debts,'' Dr. Johnson says.

One of the more interesting developments on the credit card front, Johnson says, is the movement away from department-store cards to bank cards like Visa and MasterCard. For the year that ended Oct. 31, he notes, the amount of outstanding debt on retail cards climbed 5.2 percent, but the debt on bank cards was up 17 percent.

This is in spite of the fact that many of the bank cards carry higher interest rates than store cards.

So how do you know if you've been overeating at the credit card table this holiday season? Johnson's rule of thumb is that if your payments on all forms of debt, except for your home mortgage, exceed 20 percent of your after-tax or take-home pay, you have reached your credit limit.

Another way to tell if you have too much debt is if you continually make just minimum payments on credit card bills. Doing it once or twice to get past a financial emergency is one thing; doing it all the time means you're charging too much, too often.

Also, if you're using credit for services for which you used to pay cash, that could be a sign of trouble. There may be some more opportunity to do this in the future, as some fast-food chains are testing systems that would allow customers to either use credit cards or debit cards.

If a debit card system is adopted, that would not add to the credit burden, since the price of the hamburger and fries would automatically be taken out of a checking account. But if credit cards are used, people would have to be careful about piling up lots of small charges, and not paying them off every month. Do you really want to pay 18 percent interest for a lunch at Burger King?

If January's incoming blizzard of bills is too heavy, there are ways you can cope. First, Johnson says, try honesty. Explain your cash-flow problems to the creditors and lenders and see if they can help you work things out. Don't avoid them or make promises to pay that you won't keep.

You may want to relieve your wallet of its load of credit cards for a time, and keep maybe one for emergencies and identification when you write a check. This will require some discipline not to overuse that card, but these days, it's hard not to carry at least one credit card.

To help you dig out of a deep hole, some lenders may have debt counseling programs or they can direct you to one. These services help consumers work out payment plans with creditors. Generally, you pay the service every month and the money is distributed among the lenders.

Some of these services operate on a nonprofit basis, but other programs try to make a profit. With these, there may be some exaggeration of services or benefits, so you should look around first.

Their names can be found in most Yellow Pages under credit-counseling services, or you can find them on military bases, universities, in senior citizens centers, or community action agencies.

A booklet on your rights in the credit world is available from the American Bar Association.

It's called ``Your Legal Guide to Consumer Credit.'' To get a copy, send $2 to the ABA at 750 N. Lake Shore Dr., Chicago IL 60611. Be sure to ask for the booklet by name and include its product code number, 235-0010.