It’s easy to get carried away by the holidays. There are people to see and good things to eat and presents to buy. Spending money on others can make you feel good, too, but it’s important to make sure that your good-natured giving doesn’t come back to bite you after the wrapping paper is long gone and the batteries in the latest electronic gizmo you bought for your nephew have worn out.
The December 2006 Saving for Change cautioned against holiday-induced debt, but if you missed that issue, or if you got a little out of control at holiday time and you’re trying to figure out how to manage your holiday debts, there is still hope! Here’s a 5-step plan to help you pay down what you owe and (hopefully) get far enough ahead that come this time next year, you won’t be trapped under mountains of holiday debt.
Step 1: Get the facts
Take out all your credit card statements and give them a long hard look. Circle how much you owe on each and also how much interest you are being charged on any balance you aren’t able to pay off each month. Your statement will usually include a section called ‘Rate Information’ that will show you what your finance charges are and any other fees charged by the credit card.
Step 2: Plan your attack
Create a chart with four columns: who you owe (the credit card issuer), how much you owe (your outstanding balance), the minimum payment due to that card each month, and (most importantly) the finance charge on each account. Start with the credit card with the highest finance charge (NOT necessarily the one with the highest balance due) and then go on down the line listing each credit card and the information under each column.
Step 3: Start with the worst first
Add up the minimum amounts due on each card and (now comes the hard part) figure out how much MORE than that amount you can pay each month. Your goal should be to pay more than the minimum amount on each debt each month so that you can get out from under. (Quick fact: if you only paid off the minimum monthly payment of 2% due on credit card debt of $1,500 with an interest rate of 19.8%, you’d be making payments for 35 years before you were done—in that time, you would have paid over $5,000 in interest!).
Whatever amount you can pay over the total minimum amounts due each month should be put towards your worst debt—the debt with the highest finance charge—this is your “get ahead” payment. Make the minimum payments on all your other debts, too, and pay your bills on time so that you don’t get hit with additional late fees or other charges. Try not to use your credit cards while you’re paying them off—the plan is to get ahead and it’s harder to do so if you keep racking up more debt.
Step 4: Re-direct as needed
Keep paying off more than the minimum due each month and once you’ve completely paid off the debt with the highest interest rate, pat yourself on the back, and then take the money you were putting towards that debt (the minimum payment due on that debt, plus your extra “get ahead” payment) and put that entire amount towards the debt with the next highest finance charge. You’ve already been able to live with that amount of money going towards getting you out of debt and now is not the time to start slacking off. Keep checking your debts and interest rates on your statements—particularly if you had any cards with “low introductory rates”— it pays to be vigilant and stay on top of which debts are hitting you hardest.
Step 5: Lather, rinse, and don’t repeat!
Once you pay off that debt, keep re-directing your payments (your “get ahead” payment, plus whatever minimum payments you were making in addition to that amount) to the debt with the next highest finance charge. Depending on how much debt you’ve accumulated, it can take some time to pay it all down, but once you do, you’ll have set up a plan for staying on track and (hopefully) learned to live within a set budget.
When your debts are paid, you can keep making “get ahead payments” but this time, instead of paying your creditors, you can “pay” yourself by putting that money into a savings account for a rainy day! And next holiday season, rein yourself in and maybe just get the batteries for your nephew, instead of a new toy.
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