The end of the year is marked by family, parties, gifts, and of course, food. Some people, however, pack on more than pounds during the holiday season—they also pack on post-holiday debt.
The new year is a new beginning with many people setting goals and being optimistic about their future. But the excitement of the holidays can quickly diminish as credit card statements pour in and shoppers deal with the financial fallout of overspending. Unfortunately, some shoppers rely heavily on credit cards to get through each year’s shopping season, sparking a post-holiday debt hangover.
If you are determined to pay off balances, removing credit cards from your wallet is a step in the right direction. But it takes more than a spending freeze to get rid of holiday debt.
Confront Your Debt
Hiding from debt doesn’t make your balance disappear. You can’t devise a debt elimination plan until you know exactly what you owe. Gather your credit card statements, write down your balances and interest rates, and then add up how much you owe. Once you have this number, choose a realistic timeframe to pay off the debt. From this point, you know how much of your income to assign to debt repayment every month. Let’s say you spent $1,000 over the holiday season. You’ll need to allocate at least $200 to debt repayment each month to pay down this balance in five months.
Quickly getting rid of post-holiday debt requires paying more than your minimum payments. If you have little to no disposable income, search for ways to reduce expenses. For example, look at your budget to see how much you’re spending (on average) on variable expenses each month. These expenses—which can change depending on use—are generally easier to adjust than fixed expenses. Variable expenses include groceries, shopping, entertainment, transportation, etc. By decreasing the amount spent in certain categories, you’ll have additional cash for debt repayment. If you’re averaging $250 a month on groceries, reducing your grocery bill by as little as $15 a week frees up $60 a month. Other expenses to cut or eliminate include subscription services, gym memberships, and cable packages.
Choose a Method: Avalanche vs. Snowball
If you have holiday debt scattered over multiple credit cards, two techniques can help you become debt-free. The snowball method gives priority to paying off the credit card with the smallest balance first. For this to work, pay more than the minimum due on this card each month, while paying only the minimum due on your other credit cards. Once you’ve paid off the smallest balance, take that money and combine it with the minimum payment for the next smallest balance. This method builds motivation because you enjoy small successes early on.
The avalanche method adheres to the same concept with a slight difference. This method gives priority to the credit card with the highest interest rate. Since this approach erases high-interest debt first, you save money in interest.
Negotiate a Lower Interest Rate
Credit card interest rates are negotiable if you have good credit and excellent payment history. To benefit from a lower rate, ask your credit card company for a rate reduction. This can remedy holiday debt faster because a lower rate reduces what you owe in interest. Therefore, your credit card company applies a greater percentage of your monthly payments to the principal balance.
Another option is applying for a balance transfer credit card and transferring your high-interest balance to a new card with a lower rate. Several cards offer 0% interest on balance transfers for the first six to 18 months. To maximize your savings, shop for cards with no balance transfer fee.
Use Your Tax Return
Credit card statements are not the only forms arriving in your mailbox after the holiday season. You’ll also receive tax forms from your employer. If you anticipate a tax return this year, use this money to pay off holiday debt, and then deposit any remaining funds into a high-yield savings account for the upcoming shopping season.
*Atlantic Coast Mortgage does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction.