While the holidays might be over, the bills from your purchases might be an unpleasant reminder of overspending during the past season. If you find you are one of the nearly 40% of Americans with significant holiday debt to tackle in the new year, take heart that there are ways to not only overcome it in the coming months, but also prevent the same spending pitfalls next season.
In this post we’ll provide you with a number of strategies to eliminate or reduce your debt, getting it under control before those balances get out of hand—whether your debts are small or large. Keep reading to learn our best tips for paying off your holiday debts!
Take Inventory of Your Debts
The first step to getting your debts under control is to know what they are. Make a list of all your creditors, current balances, interest rates, and monthly payments. Include in this list not only credit card and holiday debt, but other loans including mortgages, home equity loans, auto loans, consumer loans, student loans, and medical debt.
Taking the time to do the extra step of track down and list the interest rates in your notes (as well as if the interest rate is introductory and will soon go up) is essential. Knowing the details of rates will allow you to focus any extra cash that you have on the highest-interest debts, reducing the amount of interest you will end up paying, and keeping those balances from growing due to high fees.
Pay Debt Off as Early as Possible
Allocating your extra funds to high-interest debt first is a great strategy to keep your debt from ballooning. But that doesn’t mean that carrying a balance on any card is a good idea—even if you are enjoying a low introductory rate. Be sure to have a plan to pay off all your consumer debt above and beyond minimum monthly payments, to stay ahead of interest.
To demonstrate how quickly interest can add up, let’s take an example of a $5,000 credit card balance with an 18.99% interest rate. If you make a minimum payment of $100 a month, it will take you nearly 5 years (59 months) to pay off, with a total interest of $2,754.72—more than half the initial balance. If you are able to pay $250 a month on the same bill, you will cut that payment period and interest by more than half, paying it off in 24 months with a total interest of $1,039.79. And if you are able to swing a $1,000.00 a month payment, your balance will be paid off in only 6 months, with $278.83 in interest. The sooner you pay off these high-interest bills, the better.
Transfer your Credit Card Balance to a 0% Interest Card
First, let’s start with a note of caution. This is a useful strategy if and only if you know you will be able to pay off the balance before the introductory rate expires and interest kicks in, as for many of these cards, those rates can be very high. However, if you need a little time to get your debt under control, transferring a balance to a card with a 0% interest introductory rate can save you hundreds of dollars in interest, essentially acting as a short-term, interest-free loan.
Before you apply, carefully consider your total financial situation and be sure you have a plan for tackling the balance before interest starts racking up. Also, take into consideration the possible effect that applying for a new card might have on your credit score. If you are worried about actually paying off the balance quickly, it might make more sense to instead consider an actual loan that has an overall lower interest rate, rather than opening a new card with a low rate that is merely introductory.
Consolidate Your Debt into a Low-Interest Loan
If you have a lot of high-interest debt, it doesn’t make sense to allow your balances to continue to accumulate while making modest strides toward paying it off. Just like a 0% interest credit card can reduce your interest costs in the short-term, a long term loan with a reasonable interest rate can allow you to make good progress each month that stays abreast of accumulating interest. The top loans to consider include:
Personal Debt Consolidation Loans
When you consolidate your debt, you take out one new loan and use the funds to pay off multiple existing debts, including other loans, and, most commonly, credit card balances. You essentially combine many monthly payments, each with their own interest rates, turning into a single payment, often at a lower overall interest rate, which could reduce your monthly payments or the total amount you’ll pay to get out of debt.
Personal loans are usually unsecured, meaning that there is no collateral (like a home or a car) that provides assurance to the bank that they can recoup their costs if you miss payments. Because of this, the rates are often higher than the secured loans we’ll talk about below—though usually still lower than many credit card rates. Sometimes there are also costs associated with taking out a new loan, so it’s important to weigh the costs and benefits to make sure that taking out a personal loan makes the most financial sense.- To learn more about the benefits of our personal loan, check out our post, 14 Ways A Personal Loan Can Help You.
Cash-Out Mortgage Refinancing
Cash-out mortgage refinancing allows you to refinance your existing mortgage and pull some of your existing equity out in cash, which can be used to pay off other debts. If you have made progress on your home loan over the years, or your home has risen in value, this kind of debt consolidation could be the right choice for you.
Because your loan will be secured by your home, interest rates tend to be low—comparable to mortgage rates. And if your credit score has improved, current rates are lower than your mortgage interest rate, or the equity in your home is significant, your monthly payment may even go down. But cash-out refinancing isn’t for everyone. Because your debt will be secured by your home, if you fail to make payments (for instance, if the new loan’s monthly payments increases significantly), your home is on the line. Make sure the terms make sense and the cost savings is sufficient before going down this road. For more information, check out our post, To Refinance or Not To Refinance.
Home Equity Loans or Lines of Credit
Like refinancing, home equity loans and Home Equity Lines of Credit (HELOCs) borrow against your home’s equity to provide you with access to cash, which can be used to pay off your debts. Rates are similar to conventional mortgage rates, A home equity loan is like a second mortgage—you will get a lump of cash at once, which you will make payments on over time, in addition to your existing mortgage. A home equity line of credit, on the other hand, is a revolving line of credit that uses your home as collateral, allowing you to “draw” smaller payments, as needed, making smaller interest-only payments in the near term. When the draw period is over (usually after 5-10 years), you won’t be able to withdraw any more funds, and your payments will be calculated such that the balance is paid off in fifteen years. Each type of loan is useful in specific circumstances, so if you are considering utilizing your home’s equity to pay off your debt, speak to your lender to see which one is right for you.
Leverage Your Tax Refund and Cash In Rewards
When you fall into a little bit of cash, whether it is the form of tax refunds, credit card rewards, or even holiday bonuses, utilize those extra funds to pay down your existing debt. While tax season may not start into springtime for many people, once you receive all your necessary forms, you can file early to help pay off those holiday bills. Rewards are a major reason many people use credit cards for holiday shopping, and your rewards for all those holiday purchases should appear on your next billing cycle. Consider cashing them in to help offset expenses as soon as they hit. In general, whenever you have high-interest debt, it makes sense to use your financial windfalls, rather than consider it a green light for additional spending.
Assess Your 2023 Financial Strategies
The beginning of the new year is the perfect time to take a look at your budget and see what you can do to reduce your spending, re-evaluate and reduce ongoing monthly expenses, and make effective plans to tackle your debt.
Eliminating and reducing your expenses is an effective strategy to free up money to put toward your debt, especially if your debt is manageable. Our guide, The Best Budget for You, can help you create a spending plan that works for your financial picture, making sure there are enough funds to pay your bills and allowing you to allocate money for debt as well as savings.
As part of your financial strategy, you’ll also want to scrutinize your debt inventory to create a plan to pay down your debts. If your debts are smaller, focus on high-interest credit card accounts to eliminate these first. If your debts are significant, consider securing a loan to consolidate your debt and reduce your monthly bills or interest payments. If you take out a loan, however, be sure to incorporate these payments into your budget and make plans to reduce your spending so you don’t accumulate even more debt in the coming year.
Avoid Holiday Debt Next Year
If you found yourself overspending this holiday, it’s important to take measures to avoid the same fate next year. There are many ways that you can plan ahead to accommodate holiday spending, including:
- Reduce your shopping budget. Come up with creative ways to cut back on expenditures, whether it is focusing on gift-giving for the most important people in your life, skipping travel, or planning affordable alternatives to expensive holiday traditions.
- Make less trips to go shopping. Many purchases are picked up on a whim, versus intentionally made, and a significant part of your holiday spending could be cut by simply minimizing your chances of making those impulse buys. For residents of Rockland County and Bergen County, skip that last minute trip to Palisades Center.
- Save money throughout the year. If you are able to pay off your debts at some point during the year, use a savings strategy to set aside the funds you spent on your debts to start accumulating savings for next year. Consider that what you manage to save will largely dictate how much you spend next holiday season.
- Take advantage of deals throughout the year. While many larger purchases are offered at great savings throughout the year, keep an eye open for sales earlier on. Many retailers like Amazon have large sales in the summer and early fall. Additionally, winter items from sleds to coats go on deep discounts in early spring.
- Consider holiday employment. Many stores and restaurants hire additional temporary labor during the holiday season. Even picking up a shift a week could help cover those holiday purchases.
- Clean your house. Take time this year to purge your home of things you no longer need, selling items on online marketplaces or neighborhood yard sales. Put those funds aside to help offset holiday expenses.
- Utilize Buy, Now Pay Later (BNPL) plans to avoid interest. If you need to purchase an item on credit, consider using Buy Now, Pay Later to break that purchase into more manageable chunks, while avoiding the interest rates of credit cards.
Check our more holiday budgeting tips.
Make Smart Financial Choices with Palisades Credit Union
The holidays are a stressful time of year for many, but creating smart, financial strategies can help you feel in control in the new year, and prevent many of those stresses next holiday season. Whether it’s creating a plan to pay down debt, consolidating your debt with a personal loan, transferring your high-interest balances to a 0% interest credit card, or saving for next season, Palisades Credit Union has the tools to help you overcome your debt and make smart financial choices in 2023. Visit a branch location in Nanuet, Orangeburg, or New City to speak to a member of our team and find out more about what we can do for you!
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