If you racked up credit card debt over the holidays, you’re not alone: about one-third of U.S. adults take on debt each year to pay for holiday expenses. The start of the New Year is a great time to tackle that debt and prepare better for next year so you don’t end up in the same position. Here are the steps to take:
Acknowledge the cost
The first step is to determine how much you spent on the holidays this year. Look back through your bank and credit card statements and add up how much you paid for gifts, holiday decor, food, and travel. Many people ignore this step because thinking about the total cost raises feelings of shame or anxiety, but this exercise can reduce those feelings by providing you with useful information that you can then take action on.
Plan for next year
It might be tempting to focus all of your resources on catching up from last year, but doing that will make it more difficult to get on track going forward. Take the total cost you calculated from step one and divide it by 12. This will give you the amount that you need to save monthly to afford the same expenses next year. Set up a separate savings account just for this goal and automate the monthly amount needed to reach it. If after reviewing your spending from last year, you’d like to make any adjustments, take that into account first.
Budget for debt payoff
Now it’s time to start addressing your leftover balance from this past year. Create a spending plan to determine how much you can afford to pay toward your debt:
-
Monthly Income – Monthly Expenses – Savings = Debt Payoff
Make sure your monthly expenses include both your bills (fixed expenses) and day-to-day costs (variable expenses). You also need to include the monthly amount you calculated in step two to save monthly for next year. If the math isn’t mathing, explore ways to reduce your expenses or increase your income so you can dedicate some of your budget to paying off debt.
Choose a debt payoff strategy
Depending on your credit score, debt balances, and personal psychology, there are a few different ways to approach your debt payoff strategy:
-
Balance Transfer Card: If your credit score is above 680 and your balances are less than $10,000, you may qualify for a balance transfer card. This will give you a 0% interest rate for a limited period of time (generally 12-21 months). Set your payment at the monthly amount needed to pay it off before the 0% interest rate expires.
-
Personal Loan: If your credit score is above 700 and your balances are more than $10,000, you might qualify for a personal loan with a lower interest rate than what you’re paying on your credit cards. This will also give you a fixed monthly payment.
-
Debt Avalanche: If your credit score is less than 680 and you want to save the most on interest, pay the minimum on all of your debt and pay extra toward your highest interest card.
-
Debt Snowball: If your credit score is less than 680 and you want to build some momentum with your debt payoff, pay the minimum on all of your debt and pay extra toward your card with the smallest balance.
Final Thoughts
The best way to truly recover from overspending during the holidays is to prepare better for next year first, and then commit to a strategy for paying off your current debt after closely evaluating your income, expenses, and savings goals.
