How To Reduce Holiday Debt

By Andrew Beattie AAA

New Year's Eve may leave a very real hangover for many revelers, but a financial hangover is a much more common problem after the holidays are finished and the decorations are taken down. Many parents, spouses and partners overspend on their loved ones over the holidays and start the New Year saddled with credit card debt and with their finances in relative shambles.

The holidays are traditionally a time of excess. In this article, we'll show you how to avoid at least one type of holiday hangover.

December Debts
December tends to be an expensive month, even if the costs of Christmas gifts are factored out. For the northern climates, this is a time when housing expenses - particularly the heating and electricity bills - increase. The cold weather and shortened days also result in higher transportation costs, as walking and biking lose their practicality.

In the midst of this financial pinch, we have the most expensive holiday of the year. In 2011, the average American spent roughly $646 on gifts, according to the American Research Group. The financial crisis brought this number down around $417 in 2009. The National Retail Federation (NRF) estimate about 36% of those purchases were made with credit; if a person is using a high-interest store card to shop, even a $100 purchase can become a huge burden to carry into the New Year.

Pick Your Poison
When you are in the thick of holiday shopping, adrenaline flowing, a game system under your arm, a teddy bear clenched in your teeth and a credit card in your hand, it is worth taking a moment to consider with what kind of debt you're buying all of this.

A store card, for all its apparent benefits in discounts, is usually a poor choice to hold debt because these are issued with an interest rate that reflects the qualifying requirements - basically the ability to go to the till and ask for the card. These high interest cards are fine as long as you pay the complete balances before the billing period expires. If you don't, all of the gifts you buy become even more expensive with the additional interest expenses.

A revolving line of credit is the easiest way to do this if you don't have cash on hand. Getting one requires a strong credit rating, but they offer flexible capital at low interest rates. If you aren't in a position to start one, you can roll the store card balances onto lower interest credit cards. If you will be consolidating your debts into a fixed loan, it is best to wait until you're done shopping.

Thinking Ahead
Christmas has been celebrated on December 25 for more than 1,500 years, so there is no excuse for being unprepared. In the case of known expenses, it is better to save to spend rather than to spend and then pay off the debts plus interest.

If you shop for the holidays on credit, the real cost of what you buy may exceed the actual worth of the goods purchased. This is never a good thing. A savings program requires discipline and forethought, but there are even Christmas club accounts designed for this purpose. These are automatic withdrawal savings accounts that pay out the balance plus accrued interest when the holidays roll around. It may be too late this year, but there is no excuse to be caught by surprise next year - start planning now!

Thinking ahead also means making a list, checking it twice, and going after the lowest price rather than getting caught up doing your thinking in store. That's how a person ends up overbuying for others as well as finding the odd deal for him or herself. In 2010, the average shopper is expected to spend about $112 of his or her holiday total on themselves, according to the NRF. One thing you can do to keep your spending under control is to write up a gift plan and take it with you on your shopping trips. If it isn't on your list, don't buy it.

Damage Control
If all of these things come to naught and you get swept up in a mixture of credit card madness and Christmas cheer, don't despair. There is a way out. If you have overextended your credit sources and are unable to consolidate at a low rate, you will have to clear your debts slowly and systematically.

The best way is to use the seasonally appropriate snowball method. This common-sense technique involves putting the most money you can against the debt with the highest interest rate, while paying the minimums on other debts. Once the highest interest debt is clear, you focus on the next highest, and so on down the line. This will lessen your overall interest payments and shorten the length of time it takes you to repay your total. It will also have the extra benefit of encouraging you to prepare better next year.

Gifts from the Heart
Gift giving is always a tricky thing. Many manufacturers go for the "nothing says 'thinking of you' like buying your loved one (insert random product)" approach; this is made slightly ironic by the fact that the token of individual love they're toting is being mass marketed.

It can be more meaningful and more affordable to put more creativity and effort into making a gift rather than trying to show love by paying more to buy one. Few people marvel over the craftsmanship of a cell phone or develop a sentimental attachment to a fondue set. If you're creative and thoughtful, you may be able to come up with something that will be used more regularly and remembered more fondly than a factory gift.

Alternative gifts also give you the opportunity to defer costs. If you opt for a vacation package in the summer, for example, you will be able to put off the expense until summer or whenever you want to book the trip. In these cases, whether a trip to Mexico or a renovated bathroom, the presentation may be made at Christmas, but the cost will come later. This will give you time to save up properly and incur the holiday expense when your regular expenses are generally lower than they are in winter.

The Bottom Line
No one is advocating turning Scrooge for the holidays. It's OK to be full of Christmas Spirit, but you shouldn't allow your generosity to haunt you into the New Year. With some forethought and proper debt management, you can have the joy of giving from your heart without the pain of overextending your pocketbook.

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