Money Mentors provides practical tips and free supports for dealing with holiday debt, including credit card balances.
For many people, the most wonderful time of the year also ends up being the most expensive. The joy of the holiday season can quickly become overshadowed by the stress of overspending and the looming prospect of an overwhelming credit card balance.
There is no quick and easy way to deal with holiday debt. However, the first step to recovering from your Christmas spending is to understand there are a number of things you can do to improve your situation. Once you realize there are steps you can take, and people to help guide you, dealing with holiday debt starts to feel much more manageable.
At Money Mentors, we publish numerous success stories of clients who have overcome eye-watering amounts of debt, and come out the other end with financial freedom and an improved relationship with money. These clients often report the same thing: the two most important things you need are a plan and someone to help you execute it. In this article, we will list some steps that might be part of the plan. And if you need help, reach out for a free consultation with one of our credit counsellors.
Step 1: Acknowledge Your Debt
Just like with a scary film, or a nightmare after Christmas if you’ll pardon the pun, there can often be a tendency to look away, to avoid checking your balance and coming to terms with the scale of your debt. This is one of the worst things you could do. With high interest rates, credit card debt can quickly grow from a small problem into a much larger one. Get to grips with the situation as quickly as possible by getting all your bills together in one place and writing down each balance and the interest rates associated with them. If you have multiple credit card bills, consider ranking them in terms of balance, from lowest to highest – this will be helpful in a later step.
Step 2: Make a Budget
Once you’ve got a clear picture of the size of the debt, the next thing to do is draw up a budget. It’s essential that you have a good understanding of how much money is coming in and how much is going out. This is a great opportunity to make a meaningful shift in your financial life. Learning how to budget effectively is one of the most important skills you can learn.
To get you started, we wrote this how-to guide on creating a budget and maintaining it, complete with links to download an editable spreadsheet.
Step 3: Low-interest Balance Transfer
The most worrisome thing about debt is the interest, and most credit cards have very high interest rates. So, before you start thinking about paying off the debt, the best thing you can do at this stage is attempt to transfer your balances from a high interest account to a low interest account. Ask your bank if this is an option. If not, consider doing some research to find a bank with a low or 0% interest rate on balance transfers.
With that said, this option is only a temporary fix. Low or 0% interest rate accounts usually have a term of around six months. This means you’ll eventually still need to pay off that debt. If you can do so within the term of low interest, then great. If not, let’s have a look at the next step.
Step 4: Choose a Debt Payment Strategy
OK, you have acknowledged your debt, made a budget, and if possible, you have transferred to a low interest credit card or account – you’re now well on your way to dealing with your holiday debt. The next step is to pick a method for paying off your debt. There are two main schools of thought when it comes to paying off your credit card debt, and they both have cold and wintery names: the avalanche method and the snowball method. Regardless of which option you choose, make sure you have set up automated payments to pay at least the minimum on all your balances.
Pay Down Debt with the Avalanche Method
The avalanche method is all about targeting the credit card bills with the highest interest rates first. Once you have identified the credit card bill with the highest interest rate, start paying it off with any surplus from your budget. After paying off this balance, move on to the one with the next highest interest rate, and so on.
Money Mentors has a great calculator to help you do this. Give it a try with our Roll Down Your Debts tool.
Try the Snowball Method for Debt Repayment
In this method, you are looking for the smallest balance, rather than the highest interest rate. This way, you can get a whole balance paid off, reduce the number of bills you receive, and enjoy the psychological boost that comes with crossing this one off your list. Keep going though! Take the amount you were using to pay off this balance and now target the next smallest bill, until everything is paid off.
This article is for those who may have had a financially difficult holiday period and need some help dealing with their Christmas debt. If you fall into this category, then hopefully you found these steps useful. However, if your holiday debt is a small part of a larger problem, you may need to think about a more comprehensive debt strategy.
At Money Mentors, we exclusively manage the Orderly Payment of Debts program on behalf of the Government of Alberta. With a fixed interest rate of 5%, many clients find peace of mind with our federally legislated program and access to accredited counsellors for support along the way. As a non-profit, Money Mentors is committed to providing free and unbiased financial advice whatever your situation. This article provides you with a plan, but you may still need someone to help you execute that plan. Get in touch with Money Mentors, that’s what we’re here for.
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DISCLAIMER The information in this article was correct at time of publishing. The law may have changed since then. The views expressed in this article are those of the author and do not necessarily reflect the views of LawNow or the Centre for Public Legal Education Alberta.