3 Strategies For Shedding Holiday Debt

According to the National Retail Federation (NRF), consumers expect to spend $689 on holiday-related shopping this year. But, what people say and what they do is often a different story. That contradiction was evident in a 2009 post-holiday shopping poll conducted by Consumer Reports. It revealed that consumers actually spent $112, on average, more than they had planned. On top of that, holiday shoppers using credit cards spent an additional $85 more on their purchases compared to those using debit cards or cash. All these spending missteps equated to a total of $900 spent by the credit card-wielding holiday shopper. (For related reading, also check out Expert Tips For Cutting Credit Card Debt.)

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But the concern isn't just in the numbers. The same poll results indicated that more than 13.5 million Americans are saddled with holiday debt long after the gifts have been opened and the decorations are packed away. If you are part of this crowd, it's time to pay off that debt as quickly and efficiently as possible.

Strategy 1: Avoid Paying Only the Minimum
According to Bankrate, the average interest for a cash back credit card is 16.52%. Let's assume you have a card carrying that rate, your minimum payment is calculated on interest + 1% of the balance and you are among the holiday credit card shoppers who spent up to $900.

In this scenario, your required monthly minimum payment will initially only be $21.75, and that amount will decrease over time as your balance lowers. Tempting, right? Keep in mind that if you pay only the minimum, you will ultimately spend nearly the entire amount of your holiday purchases ($716) in interest payments alone! Worse still, you'll be paying the debt for 100 months.

Maybe you justified your purchases based on that great low interest credit card. Unfortunately, the lower interest rate combined with a minimum monthly payment strategy still doesn't paint a pretty picture. If that card has the average low interest rate of 10.75% reported by Bankrate, and your minimum payment is calculated on interest + 1% of the balance, you'll still pay almost $400 in interest for the seven years it will take to pay down one holiday shopping bonanza.

The moral of the story? The only person who benefits from you paying the minimum is the creditor!

Strategy 2: Commit to Fixed Payments
There is a way out of the world of massive interest payments, and that comes in the form of fixed payments. Let's assume that instead of overcharging, you actually spent the estimated average of $689 on holiday purchases.

If you can devote just $50 a month toward paying your balance and your variable rate credit card carries the average rate of 14.39%, the prospect of getting back into the black is more promising. It will take 16 months to pay off the balance, so you won't be free of the debt by next holiday season, but you'll pay far less in interest ($66 total) than if you paid just the minimum. Compared to the damage that paying only the minimum will accrue ($303 in interest over a period of 5.5 years), fixed payments become quite appealing.

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Strategy 3: Add $20 per Month to the Fixed Payments
When you're on a tight budget, it is hard to come up with extra money to pay down debt. But consider the power of increasing that $50 a month fixed payment by $20 a month. It may sound overwhelming, but $20 can be pretty easy to save if you are willing to tweak your lifestyle.

Skip the $2 coffees, make a pizza at home instead of ordering it, take your lunch to work twice a week, host friends at your house instead of going out, or carpool with a friend when you both have errands to run. The $20 will add up quick, and save you tons of money in the long run. Consider the difference of paying a $70 fixed monthly payment compared to the $50 example above. By paying just $20 more each month, your debt will be resolved five months sooner. (Just in time to start with a clean slate next holiday season!) And, you'll save $20 in unnecessary interest payments.

The Bottom Line
The holidays are a time of giving, but don't forget to give yourself the gift of stress-free post-holiday finances. And, next year, you'll be armed with strategies to buy only those presents that you can actually pay for, in the present! (For more information on credit cards, take a look at Understanding Credit Card Interest Rates.)

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