Tips for Getting Out of Holiday Debt
The good news: a sizable chunk of consumers paid for their Christmas gifts with cash and debit cards, incurring no debt. The bad news: about five times as many consumers put the presents on the plastic. According to CardWeb.com, MasterCard and VISA holiday spending levels increased 13% and 17% respectively over last year. Since very few consumers set aside money in savings or pay off their credit card balances in full each month, the majority of these credit users now face hefty finance charges.
Some studies suggest that Christmas and holiday spending accounts for as much as 30% of consumer debt. The remaining debt often results from systemic overspending – a little bit here, a little bit there; it creeps in unnoticed. Not so over the holidays. Holiday spending builds like a rushing storm and ends just as quickly. Fortunately for Christmas shoppers, holiday debt is generally smaller than other debt problems, making repayment comparatively easy. While the holidays may incite a flurry of spending, the damage is far of a problem than the pain that years of credit mismanagement can inflict.
4 Tips for Managing Holiday Debt
- Always pay more than the minimum. If you only pay the minimum each month, you guarantee yourself years of payments and thousands of dollars in interest. That’s exactly what the credit card companies want you to do. Don’t do it. Pay as much as you can toward your credit cards each month, and you’ll cut years off your repayment. See our “snowball” repayment calculator to plan your repayment strategy.
- Reduce your expenses. Free up extra money to apply towards your credit card balances. Prune unnecessary expenses until you pay off all your holiday debts. Even better, prune unnecessary expenses permanently, and put the newfound money in a savings account each month once your debt is paid off.
- Reduce your interest rate. Call your credit card company and ask them to lower your interest rates. They might do it, they might not, but it’s worth a shot. Better still, take advantage of a good 0% balance transfer offer if you can. Read the fine print to be aware of any hidden fees or charges. Make sure you know if and when the special balance transfer rate expires. Often the 0% offers apply only to balance transfers, not purchases. As a rule, you should limit spending while in debt, but if you must charge something, don’t use your 0% balance transfer card. Credit card companies apply payments to the sub-balances with the lowest interest rates. In this case, purchases will likely be subject to a much higher interest rate. Your purchase balance will accrue lots of interest charges while all your payments are applied to your 0% balance transfer balance.
- Prevention. Prevent yourself from getting into debt over the holidays next year by planning ahead. Budget for Christmas in advance and set aside Christmas dough in a savings account. Just figure out how much you can afford to spend for next Christmas, divide by 12, and stick that amount in a savings account every month. Not only will you prevent yourself from getting into debt next time, but you’ll also earn interest on your savings. If you don’t already have a savings account, we recommend that you open an ING Direct Orange Savings account.
Follow these four tips, and you’ll be on the road to being debt free. However, holiday debt often occurs due to an underlying money management problem. If you constantly find yourself in debt and spending more than you can afford, take a moment to read our Guide to Getting Out of Debt.
Happy New Year and God Bless.
