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During the holiday season, it’s easy to get caught up in the festive moment and overspend — even if that means you need to borrow to do it.
In fact, according to The Ascent’s research, more than 1 in 5 survey respondents (21.5%) ended up in debt over Christmas last year. Of those who borrowed, more than a quarter (27.5%) had no idea how they were going to get out of debt.
If you find yourself drowning in holiday debt with no clue how to pay back what you owe, there are a few options to consider.
1. Reduce your interest rate if you can
The reason debt can be so damaging to your finances is that it accrues interest. And high-interest debt, such as credit cards, can easily get out of hand. That’s why, for many people, the first step to paying off debt is to reduce their interest rate.
The good news is, there are a few ways you can lower your interest costs.
One is to use a balance transfer credit card with a 0% promotional rate. Around 13.8% of people last year used this plan and it can work well. You can reduce the rate your balance accrues interest to 0% for a long time with the right card. Sometimes, you can do this without even paying the customary balance transfer fee of around 3% to 4% if you shop carefully for a credit card that offers a promotional rate with no fee. But even if you must pay the fee, it’s often well worth it to substantially drop your rate.
The one big downside of balance transfer cards is that your rate will jump back up quickly if you don’t pay off the amount due within the 0% promotional period. If you’ve borrowed a lot over the holidays and won’t be able to pay back what you owe in time, a personal loan could be a better bet.
Around 13.4% of people last year planned to use a personal loan to pay off their holiday debt, according to The Ascent’s data. The big benefit of this route is that you can pay them off over several years with a fixed monthly payment on a set schedule.
2. Decide how much you want to pay off each month
Your next step is to decide how much you’ll pay toward your debt each month.
Ideally, aim to pay off what you owe as soon as possible to reduce your interest costs. If you can afford to do so, try to pay down the entire balance within a month or two — although for many people, that’s not practical.
At a minimum, you’ll want to be absolutely sure your debt is paid off before the holidays come around next year. Calculate how much you’ll need to pay each month to be totally free of your debt by December. Otherwise, you could end up stacking new holiday debt on top of older holiday debt.
If you’re using a balance transfer card at 0% interest, you should set your monthly payment based on the amount it would take to pay off your loan before the promotional period ends. For example, if you have $ 2,000 in debt and a 0% APR for 12 months, you’d want to commit to paying $ 182 per month. That would get your debt repaid in 11 months, giving you one to spare.
3. Rework your budget (or make a budget) to account for your debt
Once you have an idea of how much you need to pay to hit your target debt-free date, it’s time to adjust your budget to accommodate those payments. If you don’t already have a budget, make one now so you can keep your debt payoff on track.
Start by listing all your essential expenses, including your debt payment and savings. After you’ve accounted for your must-pay costs, earmark whatever is left for discretionary spending. If you don’t have enough money to pay for the essentials — including your necessary debt payment — you’ll need to look for spending cuts or ways to increase income.
If you can’t cover your bills and pay your debt off in a reasonable time frame, you may mean to take more drastic measures. See if you can raise your take-home pay by doing some overtime or even picking up a temporary side job.
4. Automate your payments
Once you’re sure you’ve budgeted money for your debt payoff, set up automatic payments for the necessary amount. That will ensure you won’t accidentally spend your funds on something else and neglect your debt balance.
5. Use any windfalls to cover your debt repayment
If you get a tax refund, a bonus at work, or any other unexpected money, consider using it to pay off your holiday debt. Last year, 29.7% of survey respondents told The Ascent they were planning to use their tax refund to repay their holiday debt.
By using money that comes outside of your regular paycheck, you should hopefully be able to retire your debt much sooner — and potentially save a fortune on interest in the process.
6. Make a plan for next year
As you work on paying down holiday debt for 2020, you may also want to take some steps to avoid ending up in the same position next year. If you save for the festive season throughout the year, hopefully you’ll have plenty of cash available in 2021 to cover all of your costs without having to borrow a penny.