A 2019 study conducted by CreditCards.com and YouGov Plc showed that more than half of consumers with credit card debt said the holidays are a good reason to borrow money. Even 26% of consumers with no debt at all said they might be willing to rack up debt over the 2019 holiday season.
Once those bills start pouring in and the monthly payments start siphoning your paycheck, you could easily regret it. By that point, however, it’s too late.
If you’re in debt from the holidays and want to pay it off, you should consider consolidating and creating a plan to get out of debt once and for all. Here’s how to do it:
Step 1: Assess the damage and add up your debts
The first step to get out of holiday debt may be the hardest since you have to see your spending in black and white. Take the time to add up all your credit card balances and other debts from the holidays to see how much you owe.
Crafting a plan for debt repayment will be a lot easier if you write down each of your debts along with the interest rate and the current balance all in one place. Here’s a good example of how your list might look:
Step 2: Choose a debt consolidation method
Once you know exactly how much debt you owe, you need to figure out the optimal way to consolidate your balances and pay them off. While there are a few other options to consider, the most popular products for debt consolidation include 0% APR credit cards and personal loans.
Balance transfer credit cards
Balance transfer credit cards let you secure 0% APR on balances transferred from other cards for anywhere from nine to 21 months. Some charge a balance transfer fee that is usually equal to 3% or 5% of your balance upfront, but the interest savings can be worth paying the fee if you get serious about your debt and knock it out quickly at 0% APR.
Because balance transfer credit cards only let you save on interest for a short amount of time, this option works best for someone who can pay off their holiday debt on an expedited timeline. That’s because once your introductory APR period is over, the interest rate on your credit card will reset to a much higher variable rate.
Personal loans let you consolidate debt with a low fixed interest rate, a fixed monthly payment, and a fixed repayment period. This means you’ll pay interest on your consolidated debt while you pay it off, but personal loans have low rates for consumers with good credit — even as low as 4.99% APR. That’s much lower than you’ll pay with a credit card since the average credit card APR is currently over 17%.
Personal loans typically offer terms ranging from 12 months to 60 months, so they can be a better option for consumers who have a lot of debt and need plenty of time to pay it off.
Step 3: Pick the best repayment plan
The right debt consolidation method for you depends on a few factors — how much debt you have, how much you can afford to pay each month, and how long your debt will take to pay off. A good debt repayment calculator can help you determine your next best steps and which debt consolidation to go with, but you can also do some basic math to figure it out on your own.
If you had $2,394 in debt to consolidate, here’s how your strategy might look with a balance transfer credit card:
For example, let’s say you signed up for a card that gives you 0% APR on purchases and balance transfers for 15 months, followed by a variable APR of 14.49% to 25.49%. This card doesn’t charge any balance transfer fees for balances transferred in the first 60 days, so you could make a fee-free transfer of your debts right away upon approval.
With 15 months to repay your holiday debt at 0% APR, you would need to pay $159.60 per month to become debt-free without interest within that time frame.
If you couldn’t pay that much each month toward your debts, you might want to go with a personal loan that offers a low fixed rate for several years. If you took out a personal loan that charged just 4.99% APR and let you pay off your debt over 36 months, you would only need to pay $72 per month to become debt-free over the course of three years. During that time, you would wind up paying $189 in interest on your loan.
Step 4: Stay the course
Whatever debt consolidation option you wind up with, make sure you decide on a concrete plan and stick with it. If you don’t, you won’t pay off as much debt as you want and you’ll prolong the financial problems debt brings into your life.
If you’re worried about paying as much as you can toward your debts, it can also help to cut your spending for a while. Eat more of your meals at home, enact a temporary spending freeze, and stay in on the weekends for a few months instead of going out. With enough small cuts in your spending, you may be able to free up some extra cash to pay toward debt or start building a savings buffer.
Also make sure that, while you’re in debt repayment mode, you’re not using credit or loans to rack up more debt. You’ll never pay off holiday debt if you keep digging throughout the year, so stop using plastic and switch to cash or debit instead.