The holidays are about spending time with friends and family and for most of us, spending money. If you are like most Americans then holiday joy comes with a price tag. Food, wine, and sweets will stretch your budget and your waistline, and that’s before you even consider the cost of gift giving! Last year, total American holiday sales were estimated at $1 trillion and Investopedia reported the average American spent $929 on gifts for friends and loved ones.
Want to prevent your holiday cheer from turning into a financial hangover? Here are ten smart tips to help you pay off your holiday debt quickly:
1. Earn Extra Income
Today the “gig economy” is booming. If you have skills that are applicable online then try advertising on websites like Upwork or Fiverr. Place an ad in your local paper or online on Craigslist. If you have a car then register to drive for Uber or Lift (the holidays are especially busy). Ask your employer for more overtime hours, or find a part-time retail job (many hire temporary holiday staff). Earning extra income over the holidays is the best way to cover your holiday expenses.
2. Remember - Not All Debt is Equal
Many stores offer special store credit cards during the holiday season with big discounts attached to them. These can be a great deal - as long as you remember to pay them off before you’re charged interest! Although these cards may offer savings of 10 to 20%, they often carry interest rates that are even higher. Worse, because they come with low credit limits maxing out a card can actually hurt your credit score.
Some stores offer ‘deferred-interest’ deals on big-ticket items, which means you do not pay any interest on your purchase for the first month (or first few months). This sounds like a good deal, but once the interest period kicks in prepare to pay for all the interest accumulated over the past few months. Remember it is “deferred-interest” not “no-interest.” If you go this route try to pay the full loan off before the interest period begins.
Looking for a new credit card with great rewards? BECU’s Visa® Card has one of the lowest interest rates in the country and offers a unique reprice program that may lower your rate when your credit score improves!
3. Make Multiple Monthly Payments
Making more than one credit card payment per month can keep you well below your credit limit and can also make budgeting easier. Just be sure to keep track of your spending and card payments.
4. Use Your Cash-Back Rewards
If you have a rewards credit card then consider cashing in your points to help you cover the cost of your holiday expenses. Whether you’ve got the BECU Cash Back Visa® (which offers 1.5% unlimited cash back with no annual fees and a low APR), collect points to go towards grocery store purchases, or collect points to cover gas – using your points to reduce your monthly costs in other areas of your budget can free up some money to help you cover holiday expenses.
5. Motivated by Emotion? Consider Paying Smaller Debts First
If you do go into debt over the holidays then it’s important to have a strategy to pay that debt off quickly. According to a study reported by Time, you should pay off your smaller debts first. This may seem counterintuitive but the scientists found that paying off smaller debts and working up to bigger debts created a ‘snowball effect’. Each time you pay off a smaller debt you feel like you’ve accomplished something, which motivates you to tackle the next debt and so on.
Be warned, however, this psychological trick might get you motivated but if could cost you more in interest payments. “This isn’t really logical. It makes more sense, mathematically, to target your debts in descending APR order. But people aren’t logical,” the article notes.
6. Motivated by Logic? Pay Your Highest Debts First
If you’re logical and don’t need the positive reinforcement to motivate you to eliminate your debt quickly then you probably don’t need the snowball effect mentioned above to help you pay off your debt. Instead, pay off the largest debts with the highest interest rates first.
7.Don't Take Out a Payday Loan!
Even the most frugal savers might be tempted to take out a payday loan during the holidays. Do not do it! Payday loan companies charge extortive interest and fees that make credit card interest rates look like peanuts. Ask for an advance or holiday bonus from work, file your taxes early, put it on your credit card, have a garage sale, reduce your gift budget - anything other than a payday loan!
8. Don't Borrow or Lend to Family
The holidays are about family and friends, but nothing drives a wedge between friends and family faster than debt. If you feel you have to loan someone you love money and you can afford it then consider gifting it instead.
9. Don't Take Money From Your Future
Avoid the temptation of using your emergency fund, your retirement savings, or borrowing against your home to cover your holiday expenses. It is better to be frugal, work a little harder, and create a smart debt management plan than to start taking money away from your future.
10. Don’t Jump into Debt Consolidation
If things get too tough then debt consolidation is an option, but it should be a last resort. Debt consolidation uses a loan to pay off all your debts, and then allows you to pay back that loan with a lower interest rate. Although it is a great tool of last resort, it can hurt your credit score. We recommend chatting with a BECU Financial Health Check Specialist first to see if debt consolidation is good choice for you.
Plan for Next Year
Of course, now is too late to start saving for the holidays, but if you really felt the crunch this year then why not create a strategy for the 2018 holiday season? Some people purchase gift cards for family friends throughout the year, set aside their tax return, or have a holiday savings fund that they contribute to each month to lessen the financial stress experienced in December and January.
Another strategy is to talk to your family and friends and find a way to reduce the financial stress associated with the holidays. Many families agree to do a “secret Santa” or other gift exchange that puts limits on the gift giving. Be open about your holiday stress – others may be feeling the financial crunch too and you may find that agreeing to get together without the presents is the best gift you can give each other!
What’s your financial approach to the holidays? Do you have any tips and tricks for reducing or paying off holiday debt?