If you overspent this holiday season, use these tips to pay off your debt.
For better or worse, the holidays have come and gone. Now that consumers are back to their usual day-to-day reality, they might be feeling the punch from their holiday spending.
The National Retail Federation found that consumers planned to spend a total of $1,048 on average for holiday items, such as decorations, and gifts for family and friends. Those who weren’t prepared to make those major purchases may have reached for a credit card to cover the bill—and now may be trying to figure out how to manage the debt.
If you find yourself with fresh debt from overspending during the holiday season, here are three tactics for paying it off.
1. Choose a Debt Payoff Method
Confronting your debt is the first step in designing a successful payoff strategy. You’ll want to analyze your balances on each card, as well as each card’s interest rate. After you have a better understanding of where you stand with your debt, it’s time to choose a debt payoff method.
There are two main debt payoff methods:
The Snowball Method. Under the snowball method, you make the minimum payment on each card and then allocate any additional money remaining to the card with the smallest balance.
Once that small balance is paid off, you proceed to paying off the next smallest balance. This series of “small wins” is repeated until all the balances are paid in full.
The snowball method is intended to encourage individuals as they proceed with their debt payoff. Paying smaller balances in full happens much faster than, say, attacking the large balances first. If you’re someone who feels anxious or like you’re drowning in debt, the snowball method can give you the motivation you need to reduce your debt.
The Avalanche Method. You can think of the avalanche method as the opposite of the snowball method.
With this debt payoff strategy, an individual first attacks the credit card balance with the highest interest rate, while simultaneously paying the minimum amounts on the other cards. This method can save you substantial money in interest, yet it may take longer to feel a sense of progress or success.
2. Consider a Balance Transfer Card
If your debt comes with high interest rates attached, this means it will cost you money while you’re paying it off. To save money (and time), consider transferring high-interest credit card balances to a low- or no-interest balance transfer card.
A balance transfer card is a credit card that comes with a 0% promotional interest period, usually of up to 12-18 months. While it sounds like a good idea, a balance transfer strategy is only effective if the individual stops spending on their card completely and pays off the debt before the promotional period ends.
Another downside of balance transfer cards is that they often come with a balance transfer fee, meaning they charge a certain percent of the amount transferred. If you get approved for a balance transfer card with a $5,000 limit, you may not be able to transfer exactly $5,000 onto it; you’ll only be able to transfer $5,000 minus the balance transfer fee.
3. Take out a Personal Loan
If your holiday spending really went off the rails this season, consolidating the debt with a personal loan could be beneficial.
A personal loan is a loan that can be used for whatever the borrower wants, and most of the time that’s to pay off credit card or other debt. Personal loans often come with much lower interest rates than credit cards.
If you’re on the fence about taking out a personal loan to repay the debt, check out this credit card payoff calculator from Make Lemonade, a comparison website. By inputting your credit card balances and interest rates, you can calculate how much interest you’ll potentially save by consolidating the debt with a personal loan. The calculator also shows how much quicker you can pay off the total debt by consolidating it with a lower-interest personal loan.
Consider this: Say you have a $7,000 balance on a credit card with a 15% interest rate. If you were to pay $250 per month to that card, you would pay it off in 2.83 years with $1,500 in interest paid. If you were to consolidate that debt with a personal loan that has a 4% interest rate and three-year term, your monthly payment would be less (around $207) and you would only pay $440 in interest over the three years. (Calculations were made with the Make Lemonade calculator.)
Personal loans are great options for high credit card balances with high interest rates, but keep in mind that some charge origination fees, which need to be factored into any savings you may realize. Also, there are now many online personal loan lenders, which can make shopping around for the best rate and terms easy.
Make These Moves Now to Prevent Overspending Next Year
It’s never too early to start preparing for next year’s holiday spending. Make these moves now to prevent digging another debt grave come December:
1. Create a Budget
The easiest way to prevent overspending is to arm yourself with a proper budget. Start putting together a list of gifts you’ll need to buy this year, and how much you can comfortably spend on each person without burning a hole in your wallet.
You can create a budget the old-school way with Excel, or you can download an app to make it easier; the Santa’s Bag app is a popular choice. This app includes a countdown until Christmas and will alert you if you’ve overspent on a particular recipient’s gift.
2. Start Saving Now
After building a budget, starting to save as soon as possible will make things less stressful when you’re ready to start shopping.
Consider automating your savings with an app. Some of these automated savings tools will round up your purchases to the nearest dollar and stash away that loose change into a separate account. If you need a bigger boost to your savings, consider automatically saving a percentage of each paycheck.
3. Purchase Gifts Earlier to Make Costs Manageable
One of the easiest ways to overspend during the holidays is to wait until the last minute to purchase gifts. Without having a plan, consumers can feel frantic while shopping just days before the holidays and, as a result, can end up spending much more than they had originally intended.
Instead of procrastinating on your gift shopping, try spreading it out throughout the year. For some, this strategy can be much more manageable than trying to purchase everything at once: Instead of needing a large amount of money on hand, you only need a fraction of the total you plan to spend. Additionally, you can more easily fit these smaller purchases into a monthly budget.
If you choose to make your holiday purchases throughout the year, get smart with how you make them. If you want to maximize your savings, take advantage of cash back on your purchases with a site like Rakuten (formerly Ebates). This website regularly advertises cash back deals from popular retailers and deposits the cash back into your account to be redeemed quarterly.
If you want to use a rewards or cash back credit card throughout the year to earn points on your holiday gift purchases or make even more cash back, do so responsibly. You should pay your balance off in full each month so you don’t end up back in a hole of debt come the end of this year.