Recovering From Holiday Debt

6 ways to get yourself back on track

Are your credit card balances from holiday shopping overwhelming you?

Do you find yourself stressing over how you will payoff your credit cards?

If holiday debt is stressing you out, or if you are just simply looking for ways to pay it down, here are six ways you can payoff your holiday debt this year AND get situated for the 2020 Holiday Season.

According to Discover’s 2019 Shopping Survey, credit cards were the favored payment type used. Credit cards have their pros and their cons, but some of you may be asking, why would someone make a credit card their primary payment source for holiday shopping?

  • For some, it is all about the points and rewards they earn on their card… but you need to be careful about this because if you are not paying the balance off on these types of cards, the balances can rack up easily. Interest rates on rewards cards tend to be higher because of the rewards factor. Essentially, you are paying more interest to get rewards.
  • Repayment options on credit cards are flexible. You only pay a portion back each month, and at the very least, a minimum payment which may equal about 1-2% of your balance, plus fees and interest.
  • Lastly, credit cards allow people to spend what they don’t have. Using credit cards for the holidays opens up spending limits, which makes people overspend. When you spend money you don’t have, you don’t feel as limited. This can lead to negative spending habits.

Mastercard just released their 2019 survey and stated that “Holiday sales rose 3.4% this year.” What does that mean? It means American consumers, like you and I, spent more this year than in 2018. 

The average person spent $1050, with a majority of that budget going towards spending on gifts for family and friends. Considering the point that credit cards were used as a primary funding source, and the fact that less than 40% of Americans can afford to pay for an unexpected expense of $1000… let’s quickly break that down: If Americans spent an average of $1050 over the holidays, yet less than 40% of people can afford an emergency expense of $1000… that raises some red flags. We need to make sure credit cards are not a primary source for spending, especially during a time that we want to splurge, like the holidays.

These six ways I am going to discuss right now can help you if you are one of those people stuck in debt from the holidays.

1. Balance Transfers– depending on your credit score and which creditor you currently use or end up choosing, you may be eligible for 0% intro rates for a promotional term. A lot of companies will offer something like, 0% for 18 months or 0% for 12 months which can really help pay down your debt. 

Some banks and credit unions may offer a low rate such as 3% for 6 months, or 2.5% for 12 months, as a means to stay competitive and also help their clients. But nonetheless, whichever promotion you end up qualifying for, make sure to also take a look at what their balance transfer fees are and if they have annual fees. You may be lucky to find a small local financial institution that has very minimal fees overall. 

Also, be sure to pay attention to what your rate will be after the promotional rate, in case you end up not paying off your entire balance before your promotional term ends. Using a balance transfer promotion and paying off your balance before the end of the term is the smartest way to utilize a balance transfer. 

2. Personal loan/debt consolidation loan– Having fixed payments and a fixed term/rate can be very beneficial for paying off credit card debt. Some lenders will actually let you do a pre-qualification on their website to see what your rate would be ahead of time. Not only does that help prevent an inquiry on your credit if you are dissatisfied, it also lets you estimate what you may be paying if you do apply. 

If you do consider a personal loan, please make sure there are little to no fees. Some creditors will charge up to 10% in loan origination fees, which can make your payments higher than expected. I would definitely suggest visiting your local credit union or community bank to see what they offer. Local banks are known to have less fees and better products.

3. Home Equity Loans and Lines of Credit– Whether you have an existing Home Equity or are looking to get one for your spring renovations coming up… these types of loans can offer low rates and flexible payments. In order to qualify, you do need to have equity in your home, along with qualifying income and credit.

If you do have an existing Home Equity, your financial institution may offer promotions for you to utilize your line of credit. If you have not utilized your Home Equity, there may be “reactivation” promotions from your bank to get you to use it again. If there is a promotion, you can save a lot of money on interest and have a lower payment. 

4. 401 K Loans– Now I don’t really suggest using your 401K for debt repayment, especially because it’s so important to save for retirement. 401K loans tend to have fees and limitations as far as how much you can really borrow. A loan like this uses your 401K as collateral, which may not really be too bad if you really need it. Depending on your plan, if you end up leaving your employer though, you may end up needing to repay that loan faster than you had thought.

I personally would try to seek other options before resorting to using your 401K, just so you don’t touch the money you have saved for your retirement. But, if you end up not having any other options, this can help save you money on interest as these types of loans are usually low-interest.

5. Savings secured loans– This is a type of loan that utilizes your money in a savings or a CD to use as collateral. This is honestly one of my favorites just because the low interest and flexible payments. Similar to an auto loan where your car is the collateral, or a home equity where your home is the collateral, a savings secured loan uses your own money to borrow against it. 

Now, that does mean you do have to have some money saved to benefit from this option, but for those that may have less-than-perfect credit, this can save you a lot of money on interest. 

A huge benefit I see from these loans is that your money still earns interest, which can help offset the interest you pay on the loan. Interest rates on savings secured loans tend to be lower than credit cards themselves, which is a huge plus! Check your local credit union or community bank to see if they offer this option! Remember, you will get your initial deposit back once you pay off the loan.

6. Debt Management Plan– These plans consist of partnering with an agency, such as a financial counseling nonprofit, to make repayment offers on your behalf to the creditor. Most of the time, these plans will have some type of setup fee and then a monthly payment that you will owe. The monthly payment will go to the agency you are working with so they can pay off your debt for you. Depending on how much debt you are in, this can help you get creditors off of your back. 

One thing I want to add though is, unless you are in a lot of debt and have debt collectors calling you, you may want to explore other options before resorting to a Debt Management Plan. If you follow some of our first choices, your debt can be more controllable, hence avoiding this option!

I know debt can be overwhelming, and I know what it feels like to look at your balances and realize you spent a little too much. Personally, I have racked up credit card debt to the point where I felt I needed to hide under a rock and cry. But what helped me was realizing there were options for me and alternatives on paying down that debt. 

How to Prepare for 2020 Holiday Season

You are probably wondering, why are we even talking about the 2020 holiday season? Well, as a financial coach, I aim to prepare my clients for what’s ahead. Here are three brief tips to help save money for holiday spending so you don’t have to rack up debt:

  1. Auto- transfers- If you have a savings account established, set up an auto-transfer from your main account to your savings. You can choose the frequency and amount you want to transfer. If you start this month and transfer $100 a month through November, you will have $1100 by December.
  2. Club accounts- Ask your bank or credit union if they offer a christmas club account, or simply a club account. Club accounts have a custom maturity date which will force you to not touch that money until the holidays. Out of sight, out of mind! Oh, and the great thing is, you can also set up auto-transfers to a club account!
  3. Payroll distributions- Reach out to your payroll department and ask what your options are on sending a percentage of your paycheck to a savings account. I normally have $20 each paycheck go into a separate savings… it adds up quickly!

The six ways we discussed today are great alternatives if you are looking to have a healthy balance between having money left in your pocket and paying off debt as fast as possible. I personally don’t like being cash poor, and if you use too much of your savings to pay down debt, you won’t have anything left for emergencies. If you have any questions or would like to suggest a future topic, email me!

Here at Two Sense we try to promote savvy financial tips by giving our two sense on your two cents!

Thanks for reading!

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