The children are playing with their gifts, the new TV is up on the wall, and that puppy has a brand-new cashmere-lined bed, when another gift arrives in the mail. This one isn’t from Santa. It’s your statement from your friendly credit card company. They want to know how you are gonna pay for all this.
The average American consumer will have spent more than $1,000 on gifts this season, according to the National Retail Federation. And with six out of 10 Americans not having at least $1,000 in savings in the first place, that money for gifts has to come from somewhere, and that “somewhere” is typically a credit card or a personal loan.
While delinquencies remain far below what they were in the Great Recession, millions of Americans still live paycheck to paycheck and additional debt can become a big problem quickly.
The first thing you need to do is create a list of all credit cards you have, the balances on them, the interest rates and when each credit card payment is due.
Now that you know what the damage is and where it’s coming from, there are typically two ways to pay it off. One is the “snowball” method made popular by radio host and financial advice giver Dave Ramsey, which is to pay off your highest interest rate credit cards first. Then transfer the funds you have been using to pay off those high balances, to aggressively pay off the smaller balances.
Sometimes you need a bit of a boost of self-confidence to help encourage you to tackle the bigger challenges. The other option is to pay off several small balances first, said Greg McBride, chief financial analyst at Bankrate.com. This option isn’t as financially efficient, but it might be better for your mental well-being.
But paying off small balances should not cause you to neglect aggressively paying off the higher balances once they are all you have left, McBride said.
Another common method to pay off holiday gifts is to use your upcoming tax refund. But personal finance experts recommend trying to plan ahead so you are not having to rely on Uncle Sam (and the whims of Congress) to make sure you can cover your expenses.
Using your emergency fund, if you have one, is not recommended to pay off holiday debt. Unless you have an explicit plan to rebuild those savings and not touch them in the future, it’s best to leave that money for true financial emergencies.
To avoid being in this situation next year, try be more proactive about your budgeting each month.
One long-term suggestion McBride and other financial experts recommend is to plan ahead for next year’s holidays. Add up all the money you spent on gifts and vacations for the family this year, and then divide by 12.