How to attack your holiday debt: 8 strategies to get you back on track

The holidays are over, and now the bills are rolling in.

While it may have seemed like a good idea at the time, your spending may now feel like a weight dragging you down.

“The holidays are about family and I think nothing gets people to spend more than when they are looking after the people they love,” said Tiffany Aliche, a financial educator and founder of The Budgetnista, a financial movement aimed at women.

If you shelled out more than you had expected, you aren’t alone. In fact, 31% of consumers took on debt to pay for their holiday expenses this year, according to MagnifyMoney’s annual post-holiday survey. Those who did borrowed $1,381 on average. More than half (56%) used credit cards and 27% took out a personal loan.

More from Invest in You:
Mother’s budget game plan: freeze non-essential spending for January
Here’s how to make that financial New Year’s resolution a reality
Can’t afford an estate plan? What you can do without spending a fortune

People also dipped into their savings, with 1 in 4 consumers withdrawing money in December, personal finance website MagnifyMoney found.

For some, it was a way to make up for a bad year, said Matt Schulz, chief credit analyst at LendingTree.

“There were an awful lot of people who wanted to blow out some holidays and occasions to make up for how crummy the rest of 2020 was,” he said.

If you overdid it, there are things you can do to get back on track.

If you don’t have a budget, make one. If you have one, revisit it, Schulz said.

“You can’t make a meaningful plan to knock down your debt without having a full understanding of how much money is coming in and going out of your household in a given month,” he said.

In addition, make a debt list that includes who you owe, how much, the interest rate and the status of the debt, Aliche recommends.

This way, you can keep track of it and know where you stand.

Once you know your budget and what you owe, you can determine whether you need to cut expenses, increase your income or most likely, a little bit of both.

When it comes to paying off credit card debt, there are two different schools of thought.

You can do the snowball method, which is paying off the lowest debt first and the minimum payment to the rest. Once that is paid off, you move onto the next lowest, Aliche said.

Conversely, the avalanche method focuses on paying down the debt with the highest interest rate first.

There are benefits to both, said Aliche, which is why she uses a combination. She would start with the snowball method, since it gets you quick success. However if there is other debt within a $100 range, she would turn to the avalanche method and pay the one with the higher interest rate first.

Once you decide your method of repayment, automate it, Aliche advises.

“Debt is not fun,” she said. It is not like saving for vacation.”

“Don’t do it — let automation” do it, Aliche added. “Set it and semi-forget it.

“Check in monthly to see balances.”

If you have a good credit score, you may be able to get a credit card with a 0% rate on balance transfers.

“They’ve gotten hard to obtain during the pandemic,” said Ted Rossman, industry analyst at CreditCards.com.

If you have a credit score of at least 700 you may be able to get one, although 720 or 740 would make you a stronger applicant, he said. Then transfer the balances from your higher-rate cards onto the 0% card, to save money on interest rates.

If you have a good credit and good relationship with your card issuer, call and see if it can lower your existing rate.

In fact, 78% of cardholders who tried that strategy in 2020 were successful, a December poll by Bankrate found.

“To improve your odds, come armed with competing offers that you received in the mail or saw online,” Rossman advised.

“It also helps if you’re a good customer who has been with them a while and pays on time,” he said.

No matter whether you consolidate your debt onto a lower-interest-rate card or get a lower rate on your current one, be sure to pay more than the minimum amount due on your cards. The typical minimum payment is just 1% of the balance, plus interest, Rossman noted.

With the average household credit card debt coming in at $6,300, according to the Federal Reserve, and an average interest rate of 16%, according to CreditCards.com data, it will take you more than 17 years to get out of debt, Rossman said. You’ll end up paying more than $7,100 in interest.

“If you double the initial monthly payment and stick with it, you’ll be debt-free in a little over two years with an interest expense of approximately $1,100,” he said.

“That’s a big difference.”

Even if you only have $1,000 in holiday debt, with a 16% rate, it would take you about three years to become debt-free if you only paid the minimum. The total interest would be roughly $267, Rossman calculated.

Another way to consolidate your debt is by taking out a personal loan through a bank or credit union. If you have good credit, you may get an interest rate as low as 6% or 7%, with a typical term of one to five years, Rossman said.

Credit card companies also have their own versions of personal loans, which don’t require any additional underwriting. You can designate purchase to be paid off in installments, which gives them more predictability and a lower interest rate, he said.

“These companies often prefer to call it a plan fee rather than interest, but it’s basically interest,” Rossman noted. “The equivalent APR [annual percentage rate] would often be something like 7% to 10% for a plan paid off within a year or so.”

Reputable, nonprofit credit counselors can help you come up with a plan to consolidate your payments and lower your rates.

The plans often last about two to five years and carry interest rates in the 6%-to-10% range, Rossman pointed out.

It is best for those who owe at least a few thousand dollars in unsecured debt, such as credit cards and medical bills, he said.

Anything that is not part of the income from your regular job is considered unexpected money, Aliche said. That can be a bonus, raise, tax refund or the $50 your grandmother slipped you at Christmas.

It can also be money you saved by buying something on sale.

Ideally, within 24 hours of receiving it, apply it towards your debt, she said. However, if you don’t have an emergency savings fund, that’s the first thing you need to start putting your money towards.