High credit card balances can cause a lot of anxiety and stress when you can’t pay them off in full. Amounts you carry from month to month result in higher interest charges and bring down your credit scores, which negatively affect many areas of your financial life.
In this article, I’ll cover 5 steps to get out of post-holiday debt faster so you take control of your finances and move in the right direction.
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5 Steps to Get Out of Holiday Debt Faster
Schedule time with other stakeholders in your financial life, like a spouse or partner, to go through each of the following steps to eliminate debt from the holidays:
Step #1: Review your financial situation
Before you can solve a problem, you need to take stock of the situation. The best way to get a bird’s-eye-view of your finances is to create a document that I call your Personal Financial Statement (PFS). I recommend that you create your PFS and update it monthly as you focus on paying down debt.
To create your PFS, make a list of your assets and their current values, such as your bank accounts, retirement accounts, investing accounts, real estate, and vehicles. Then list your debts and the balance owed for mortgages, car loans, student loans, and credit cards. Include the interest rate you’re paying for each debt so you know which ones cost the most on a percentage basis.
When you subtract your total debts from your total assets, you’ve calculated your net worth. For instance, if you have $200,000 in assets and $190,000 in debts, your net worth is $10,000.
It’s important to track your net worth over time so you know if you’re building wealth or losing it.
It’s important to track your net worth over time so you know if you’re building wealth or losing it. You increase wealth by increasing assets (like emergency savings and retirement accounts), shrinking debts, or ideally, doing both at the same time.
Also see: Financial Planning Success in 3 Easy Steps
Step #2: Make a debt payoff plan
Once you have a list of all your debt names, amounts, and interest rates at your fingertips, you’re ready to create a strategy to pay them down. Here are some ways to approach your payoff plan:
- Create a debt deadline, such as getting rid of your extra holiday debt load within 90 days. Simply divide the amount you racked up by three to determine how much extra you need to pay monthly over the next three months. For a longer-term plan, your card statement shows how much you must pay to wipe out the balance in 36 months—if you make no additional charges.
- Target the smallest debt amounts first regardless of interest rate. Let’s say you owe $1,000 on a credit card that charges 12% and $5,000 on one at 19%. You might enjoy a great sense of accomplishment and momentum by wiping out the $1,000 debt first. Then you’d move on to the next highest amount. However, for larger balances, I recommend the next strategy.
- Target the highest interest rate debt amounts first regardless of amount, which is known as laddering. For instance, if you owe $15,000 at 22% and $8,000 at 12%, you’d pay off the 22% rate card first because it’s costing you the most. Getting rid of debt in order of highest to lowest interest rate makes the most mathematical sense because you save more interest over the long run.
- Create a combo debt strategy that uses any of these plans. For instance, you might commit to paying off a relatively small, low-interest debt over three months to get a quick win—and then turn your attention to your highest-interest debts.
If you target the highest interest rate debt first, you could pay double or triple the minimum payment, or whatever you can afford. Or you could set a flat amount to pay, such as $500 or $1,000, while continuing to make minimum payments on your other cards.
No matter which debt payoff plan you choose, be as aggressive as possible and stick with it. Once you zero out a balance, be cautious about closing a credit card because it can hurt your credit.
Also see: Canceling Credit Cards: 5 Questions to Ask Before Closing Accounts
Step #3: Consider optimizing your debt
Optimizing debt involves strategies to pay less for it. That doesn’t make the total amount you owe disappear, but paying less interest allows you to pay down the principal balance faster.
If you have a clear plan for paying off a debt within a year or 18 months, consider how moving it to a 0% balance transfer credit card could help you save money. Transfers usually charge a one-time fee, such as 2% or 3%. However, if you’re paying double-digit interest, you’ll come out ahead—until the 0% promotional offer expires.
So, the trick to using a balance transfer card successfully is to know what the interest rate will be after the low- or no-interest period expires and to have a plan to pay off the entire balance before the promotion ends and the rate jumps. Otherwise, you could end up paying a higher rate than you started with!
Another way to optimize debt is to transfer it to a low-rate personal loan, which is also known as a signature loan. This is a great option if you don’t trust yourself to stay away from running up credit card balances.
You agree to make set monthly payments over a certain amount of time, such as 36 months, and then the account is closed. The downside is that the payment will be higher than a typical minimum credit card payment and you won’t have the flexibility to pay less. Also, the interest rate depends on your credit, meaning it may not be less than your credit cards if you don’t have good credit.
Also see: 8 Pros and Cons of Using Personal Loans to Consolidate Credit Card Debt
Step #4: Create a spending plan
To make your debt payoff plan work, incorporate it into a realistic spending plan for the year. You can track your income and expenses using a budget planner spreadsheet, a free app like Mint, or a desktop software with lots of functionality, like Quicken or Quickbooks.
I’m a big Quicken fan because it allows you to view all your financial accounts in one place, assign a category to each transaction, view reports, and monitor your budget by spending category.
Setting goals and watching how much you spend on dining out, clothes, and luxuries, is a crucial part to getting out of debt. Experiment with less expensive meal options and trim your expenses every way possible. Pick one or two services that you could eliminate or purchase less often.
Make sure to include savings goals, such as a holiday fund, an emergency fund, and retirement contributions in your spending plan. Ideally you’ll set these up as automatic transfers from your checking account into your savings account or retirement plan so you don’t have to think about them.
You could even open a separate savings account just for holiday expenses so you have a debt-free holiday next year. Keeping those funds out of your checking account makes it less tempting to spend them on something else.
In chapter two of my book, Money Girl’s Smart Moves to Grow Rich, I go into detail about how to create and monitor a spending plan. You can click here to download chapters one and two for free.
If you’re using credit cards to fund a lifestyle that you can’t afford, own up to it right now and reverse the damage quickly.
Step #5: Stop making new charges
No matter if you create a spending plan or not, to get rid of holiday debt fast, you’ve got to put the brakes on your credit cards. It’s much easier to pay off debt when you aren’t piling more on top! And if you have extra income from a bonus, tax refund, or unexpected windfall, always use it to pay down debt.
If you’re using credit cards to fund a lifestyle that you can’t afford, own up to it right now and reverse the damage quickly. You know what you’re buying that you shouldn’t. We all have different temptations; I know that quitting the bad habit of overspending isn’t easy.
My weakness has always been shoes and clothes—maybe you can relate? Or perhaps you’ve gone crazy lately furnishing a new house, buying too many gifts for kids, or splurging on vacations that you don’t have the money to pay for.
We all have guilty pleasures and I’m not saying that you don’t deserve some of them. But when you have credit card debt that’s holding you back from achieving your goals—like fully funding a retirement account or building an emergency fund—you’ve got to make sacrifices to get your debt under control.
Debt doesn’t have to burden you forever. Use these 5 steps to take charge of your finances so you control your credit card debt instead of it controlling you.
See also: A Blueprint to Prioritize Your Personal Finances
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