Over the next month or so, 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 pretty smart with their money are sometimes facing credit card bills this time of the year.
What can you do when you’re usually in good financial shape but you’re facing this sudden burst of debt? Here are five strategies for handling that debt.
1. 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. Make a list and simply organize your debts so that you always know which debt you should be focused on. Organize your debts by interest rate, with the highest interest rate debt always at the top of the list.
2. 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, whether it’s a perfect holiday gift for someone or perhaps something they want for themselves, and they simply buy without thinking too much about it. That’s a huge mistake, and it’s one that’s fueled by the ease of use of credit cards. Again, 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
3. Use a line of credit to pay off your credit cards.
Aside from consolidating your debt, this is where a personal line of credit can really pay off. Lines of credit usually come with a significantly lower interest rate than credit cards.
4. Use annual bonuses for debt repayment.
Some people receive an annual bonus from their employer in December or January. While it’s tempting to look at that money as a windfall with which to buy lots of fun items, step back for a moment and look at the big picture. These kinds of windfalls actually give you a unique opportunity to take care of those pesky debts and get your financial house in order.
5. Refinance your mortgage.
While refinancing a mortgage to pay down debt means you will owe more on your mortgage, because of the lower interest rates, you will also free up cash—which you can put down on the mortgage to help pay off your mortgage more quickly and build up additional equity.
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 why not start preparing now?
Personally, I like the “Christmas account” strategy, similar to the ‘vacation account’ if you deposit $10 or $20 each week you’ll have between $500 or $1,000 – at the beginning of December. That was perfect timing for holiday spending.
This simple plan will take care of a ton of holiday stress at the end of this year and will prevent you from re-reading this article again next January.
There was a time in my life when I truly dreaded the holiday bills. 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.