If you’re wondering where all of your money went after the holidays, you’re not alone. Americans racked up an average of $1,054 in debt this holiday season, and they may be overwhelmed by credit card bills they didn’t expect so early. According to a Magnify Money survey, more than two-thirds of shoppers paid for gifts and other holiday purchases with credit cards in 2017. Store cards were used for 17% of those purchases, but 9% of shoppers used a personal loan while 4% took out a payday or title loan.
Average debt for the holiday season increased 5% over 2016 figures. Another two-thirds of shoppers didn’t plan to spend as much as they did. Some took on well over $2,000 in holiday debt.
If you’re feeling the holiday debt hangover, we have five ways you can begin to recover your finances in Los Angeles.
1. Create a Holiday Debt Payoff Plan
Only about half of shoppers said they expected to pay off their holiday debt within three months, with the rest saying it will take longer. If you haven’t already created a budget for 2018 — or haven’t been budgeting at all — now’s the time to do so. Take a look at your spending and figure out where any extra money is going that can be redirected toward paying off debt.
Try the snowball method — categorize your debt by amount and type, and work on paying the smallest bills first so you can stay motivated after feeling the rush of paying off one at a time more quickly. Aim for paying off cards with higher APRs sooner than ones with better rates. Track your spending through a personal finance app or your own spreadsheet or system, and keep track of your credit score to see how it improves as the months go by. Mint.com allows you to check your credit score once per month.
2. Make More Than the Minimum Payment
Only paying the minimum on a credit card bill tends to trap shoppers in a vicious cycle of paying some interest every month instead of any of the balance, and they tend to go nowhere fast. Paying off $1,000 can take months on end, when throwing a little extra money above the minimum payment can do wonders for your wallet (and psyche).
Consider a holiday credit card bill for $1,000 with a 15% interest rate and a minimum $25 monthly payment.
- If you pay the minimum, as 10% of shoppers say they plan to this year, it will take 55 months (or 4.5 years) to pay off that bill — which includes another $500 or so in interest tacked on.
- Putting forward an extra $5 per month lowers the time to pay off by an entire year (43 months total).
- Doubling the monthly payment to $50 will take you just under two years to pay off that holiday bill (23 months).
- If you pay $100 per month on your credit card bill, it’ll be paid off before the next holiday — in 11 months.
Take a look at your credit card bills and crunch the numbers yourself. You can do the math on your own, or use a handy online credit card payoff calculator, like this one from Bankrate.
3. Double-Check Your APR
As you’re rolling through the first couple of months of the year, you’re probably feeling pretty great you’ve been able to pay twice the minimum monthly due on your credit card. But was that credit card a store credit card? Some special credit cards, particularly ones opened during the holiday season, may come with stricter time limits on introductory APR rates.
Double-check that fine print. Many store credit cards have a deferred interest clause, after which a certain period — often only 6 months — the APR shoots up to higher than many bank-issued cards’ APRs, in the range of 25%. Balances that aren’t paid in full by the end of the special APR rate period also may be charged interest retroactively, adding insult to injury if you haven’t been paying careful enough attention to your holiday debt payoff plan.
4. Consider Transferring Your Balance to a Lower Interest Card
Balance transfers come with some caveats. If you haven’t racked up a ton of other debt and have paid most or all of your bills on time (read: you have a good credit score), opening a balance transfer credit card can be helpful in the short term. There are some good deals out there, for sure — 0% APR for several months while you steadily pay off your holiday debt — but it’s important to be mindful of how balance transfers may affect you in the long run. Many balance transfers also come with fees, and if you don’t use the cards carefully, you can wind up in more debt.
If you already have a lot of open lines of credit, having too many credit cards (especially newer ones) can negatively affect your credit score. If you’re young and trying to build up your credit, or you don’t have too many credit cards, responsibly using a balance transfer card can be good for your credit score. Like paying attention to the APR of your original credit card used to take on debt, make sure to keep the expiration date of your balance transfer card’s introductory APR on your calendar.
See also: Charge-Offs: What You Need to Know
5. Consider Alternatives to Debt
Did you open a new credit card or pile on charges to an old one for the holidays because of other bills that have gotten in the way? Perhaps you have outstanding medical bills from an illness or are struggling to pay off student loans, and you’ve turned to credit cards to help. However, you shouldn’t be taking on new debt alone — at least not until consulting with someone who is qualified to guide you through your options. That could be a financial adviser, or it could be a bankruptcy attorney.
Although bankruptcy has a bad stigma, it can often be very good for someone who needs a fresh financial start. Credit card debt is dischargeable in bankruptcy, meaning your slate is wiped clean and you often pay pennies on the dollar for debt owed. Refinancing debt when you have no way to pay it off isn’t going to help, and budgeting without a very positive feeling about your financial future can be disheartening. You definitely don’t want to dip into your retirement savings or use a home equity line of credit to pay off credit card debt, either.
M. Erik Clark is the Managing Partner of Borowitz & Clark, LLP, a leading consumer bankruptcy law firm with offices located throughout Southern California. Mr. Clark is Board Certified in Consumer Bankruptcy by the American Board of Certification and a member of the State Bar in California, New York, and Connecticut. View his full profile here.