By Trent Hamm
January 7 – In many mailboxes, bills from the countless expenses of the holiday season are starting to arrive. People used their credit cards for gifts, food, flights, hotels, gasoline, and other expenses that often come with celebrating the holidays. Even people who are otherwise smart with their money sometimes face credit card bills this time of the year. Here are five strategies for handling that sudden burst of debt.
- Focus on the highest interest debt.
You should always make the minimum payments on all of your debts, but if you have debts spread across multiple credit cards and loans, your focus should be squarely on whichever debt has the highest interest rate. This is the fundamental principle of a debt repayment plan, which is simply an organized list of your debts so that you always know which debt you should be focused on. My recommended debt repayment plan organizes your debts by interest rate, with the highest interest rate debt always at the top of the list. This is the key to getting rid of high interest debt. You absolutely have to be making more than the minimum payment on whichever debt you’ve chosen to focus on.
- Purge your closets.
One powerful step that anyone can take to get a big boost against their debts is to simply dig through their closets and sell off some of their unused stuff. The other technique is to simply go through your closets and other storage spaces, like your attic and the rafters of your garage. Once you’ve done your selling, take the proceeds and apply them to your credit card with the highest interest rate. You’ll immediately cut the balance and, even better, you’ll reduce the interest you’ll be paying on that debt.
- Transfer that balance and consolidate.
In an effort to drum up business, many credit card companies offer balance transfers. If you sign up for their credit card, they’ll allow you to transfer the balance of one (or more) of your other credit cards to that new card, usually with a 0% interest rate on that transferred balance that lasts for a long while, as much as eighteen months. The trick here is to remember the money you transferred especially since you’re not paying interest on it right now.
- Cut back in smart ways.
Cutting back often gets a bad rap. People often immediately think of their favorite splurge – the one that they really value – and associate “cutting back” with losing that particular splurge, so they think of it as miserable. That’s the wrong perspective to take. You should focus your efforts in cutting back on the areas of your life that are less important to you, not more important.
Focus on things like your laundry detergent or your soup crackers or your dishwashing soap or your canned tomatoes. Buy those things in generic form, as the generic version is often functionally identical to the name brand version.
- Stop using your credit card (for a while).
It’s the convenience of the credit card that often gets people in trouble. They see something that they want, and they simply buy without thinking too much about it. The key here isn’t to deny yourself the things that you want. The key is to be more mindful of the things that you’re actually spending your money on. Is this thing you’re about to buy going to be something you’re really going to use a lot? Or will it wind up stuffed in the closet in a month or two? Do you really need this item of clothing? Do you really need this new book or this new game? The easiest way to reintroduce mindfulness into your purchases is to use a few simple rules for purchases.
Start Preparing Now to Avoid This Debt Next Year
You know that the holidays are going to come again at the end of the year. You know that they’re going to bring extra expenses along with them. So start preparing now. Utilize the “Christmas club” strategy, named after a special savings account that my family’s bank used to offer. You can implement this yourself by simply transferring $10 or $20 (or $50 or whatever you need) per week into a “holiday” savings account designed to cover gifts, travel, meals, and other holiday expenses. I highly recommend setting up an account with an online bank like Capital One 360 for this purpose. Set up an automatic weekly transfer to take that small amount out of your account each week.
Final Thoughts
Managing holiday expenses is actually a big part of maintaining that debt-free life. It is so tempting to overspend during the holidays, but that overspending can haunt you for a very long time. Here’s your plan: work very hard this year using the strategies above to get rid of your holiday debt from last year. At the same time, implement a “holiday savings” strategy so that you don’t fall into this trap again at the end of this year. Next January, you’ll find yourself in a much, much happier position.
Phyllis R. Varnon
Extension Agent
Community Economic Development
Zavala, Dimmit and Uvalde Counties
(830) 374-2883