Many of us start the holiday season with good financial intentions, only to see them disappear like a rabbit in a cheap conjuring trick as the magic of Christmas takes hold. When it comes to money, all that seasonal goodwill can have a damaging effect on willpower. American shoppers spent $265.9 billion in November and December last year, up a higher-than-expected 2.7 percent on 2012, according to a Jan. 8 estimate from ShopperTrak. Of course, not all of that was piled onto credit cards. Still smarting after the recession, many consumers continue to use debit or prepaid cards, although perhaps the smartest use credit ones while paying off their balances in full each month. Nevertheless, the Federal Reserve's latest consumer credit data show "revolving credit," which is nearly all credit card debt, piling on $4.5 billion in the three months ending Nov. 30. December's figures won't be out until February.
Happy new year!All of this means that some readers have likely started 2014 with the financial equivalent of a hangover. If you're one of them, don't let your headaches get you down. Unless you were close to the edge of bankruptcy before the holiday season started, you can almost certainly find ways (think of them as Alka-Seltzer for money) to ease your pain. How hard it's going to be to swallow this medicine will likely depend on how big your problems are. So pick and choose from the advice below, and follow the plan that best suits your particular needs.
Balance-transfer credit cardsThe easiest way forward is to shift as much of your plastic debt as you can onto balance-transfer credit cards. At the time of writing, IndexCreditCards.com's listings show a broad range of these products, offering zero-percent APRs for long periods, including some of 18 months. Within a pay-down plan to which you're fully committed, that sort of extended time free of interest could provide you with a useful breather from high-cost debt. However, these products come with special dangers for those who struggle to manage their finances well, and many find they end up owing more when the balance-transfer offer expires than they did at the beginning. So bear that in mind before applying, along with these other considerations:
- Expect to pay a one-time balance transfer fee, usually 3 percent of the sum you transfer.
- Don't use the card for new purchases or other charges while the zero-percent deal is current.
- Your application is unlikely to be approved unless your credit score is in the good-to-excellent range.
Protect your credit scoreNo matter how tight your finances are in the first few months of 2014, your priority (after eating, keeping the lights on and getting the family to work and school) should almost certainly be to protect your credit score. That's always been important for future borrowing and certain other financial transactions, but now some employers check your credit report before promoting you, and some do so before making new hires. In December, Senator Elizabeth Warren (D-MA) introduced a bill to ban this practice, but its chances of enactment anytime soon seem slim.
The single most effective way of avoiding credit score problems is to pay all your bills on time. If you're already behind with any, catch up as quickly as you can, but do your absolute best to keep up to date in the future -- even if that means making only minimum payments on your cards. It's true that using up too big a proportion of your credit limit can also damage your score, but you're better off keeping up payments than skipping some to reduce balances that are too high.
Paying down credit card debtShort of bankruptcy, there aren't any quick and easy ways to eliminate card or other debt, and you should be deeply suspicious of companies that claim they can provide shortcuts. Debt loss is very similar to weight loss: One's all about changing the balance between the calories you take in and the ones you expend, and the other's exactly the same, but with dollars. And, just as you need to count calories, you need to count those dollars. So the first step to eliminating debt is to understand how much is coming in and going out -- and that means old-fashioned budgeting, either on paper or using a spreadsheet. First, you need to deduct truly unavoidable expenses from your earnings; what's left is your disposable income. Now, count every cent you spend for a month or two to see where that disposable income is going. Unless you're already extremely frugal, there should be plenty of opportunities to cut back.
Make a plan to succeedUsing a Date Estimator credit card calculator, prepare on paper an optimistic yet realistic plan with plenty of goals and milestones so you can check on your progress. Expect things to go wrong occasionally, and adjust your goals if they're too difficult or too easy to achieve, but commit yourself to honoring your plan as best you can. Use the savings you make to pay down the most expensive (probably the highest-interest credit card) debt first, while keeping up minimum payments on all accounts. When the balance on your highest-rate card is zero, you can move on to the next highest, and so on. As each card is paid down, you won't have to make a minimum payment on it, so you should have more and more money to devote to reducing the remaining balances. This "snowball effect" should do wonders for your morale.
Sounds easy? It won't be. But the feeling you're going to get when you're debt-free should make it all worthwhile -- and then some. Who knows? This time next year you might be entirely free of holiday hangovers.