The spirit of giving is what makes the Christmas season so special – but it makes some Americans sink deeper into debt.
Nearly a quarter of Americans (22%) expect Christmas shopping to bring them into debt, according to a recent NextAdvisor poll. This adds to the existing debt: the average credit card balance per American is $ 6,194, according to Experian.
People tend to feel a lot of pressure to keep up during the holidays, says Corbin Blackwell, CFP, financial advisor to robo-advisor Betterment. “There are a lot more invitations, a lot of hype about gifts and parties. Lifestyle activity tends to increase. “
Although the COVID-19 pandemic prevented many from traveling this year, people are still taking on debt – a phenomenon exacerbated by the high unemployment rates in the United States. According to a survey by creditcards.com, 57% of cardholders who owe credit cards said they were willing to take on more debt over the holidays.
Pro tip
Save money for the holidays all year round with Bernadette Joy’s $ 1 rule: If an item doesn’t cost $ 1 or less per use, it’s probably not worth it. Focus on buying only what is used frequently. This makes the occasional splurges both manageable and meaningful.
How to Consolidate Vacation Debt
If you have large balances on multiple credit cards, especially those with high interest rates, it may be wise to combine these debts into one manageable payment. Not only does it make debt payments easier, but it can save you money over time if you can get a better annual percentage rate (APR). This way you will be spending less interest per month and investing more in your actual capital balance.
But debt consolidation is not a panacea. You need a plan to pay off the debt and a solid budget before you consider a debt consolidation. Otherwise, you’ll just take on a new form of debt. “If you really don’t want to run, signing up for a marathon won’t help you,” says Blackwell.
Once you’ve done the hard work of strategy for that lifestyle change, there are four main methods to consolidate vacation debt that you can consider: 0% APR credit transfer credit cards, debt consolidation loans, second mortgages, and debt management plans. Each has its advantages and disadvantages, so it is best to evaluate which one is suitable for your long-term financial health. Whichever approach you choose, you should make sure that the single APR that you are consolidating at is lower than the total APR of the cards or loans that you are consolidating from.
1. Introducing 0% APR credit transfer credit cards
A balance transfer is when you transfer the balance of one or more credit cards to another credit card that offers a lower or introductory 0% Credit Transfer APR.
Although such offers were a little harder to come by in 2020, these cards offer a 0% balance transfer APR introductory period to entice you to open an account with them. This means that for a period of time (usually between a year and 18 months) you won’t have to pay interest on the transferred credit on the credit card, which means you can repay the principal faster.
Transferred credit cards are a popular option because 0% APR is really a great money saving option for those looking to get back on track with their financial health. But if you’re not careful, this could be an invitation to spend more, warns Blackwell.
People often think they are clean once they complete a balance transfer to a 0% APR card, but that’s not the case, says Bernadette Joy, founder of Crush Your Money Goals and NextAdvisor author. At the end of this introductory APR period, “They come to me … and say, ‘I didn’t do anything with it. All I’ve done is postpone the inevitable. ‘”
If you decide to consolidate debts on a remittance credit card, make sure you make payments on time and in full – and that you can afford to settle your debt before the introductory 0% remittance APR offer ends . Otherwise, you could get stuck paying interest on that balance and fall back into a debt cycle.
2. Debt Consolidation Loans
Debt consolidation loans are a type of personal loan that allows you to combine multiple types of debt – such as credit cards, personal loans, and medical bills – under one fixed rate.
They are usually unsecured, which means that you do not need to secure the loan with an asset as collateral. One benefit of a debt consolidation loan is that it has a fixed repayment period (often three to five years) in which to pay off the loan. This means you’ll know exactly when the debt will be paid off, provided you can stay on track with the same monthly payments over time.
“If you have really manageable debt … and accidentally miss out on payments that you could easily have made, consolidating it into one loan makes a lot of sense,” says Blackwell. But remember, “It’s not a magic potion. It’s really just to help you get organized. ”
3. Second mortgage
If you are a homeowner, another option you may consider for vacation debt consolidation is a home equity loan or a line of credit (HELOC) line of equity. These two debt consolidation methods allow you to borrow against the value of your home and use the funds to pay off your balance. Second mortgages can be harder to come by compared to the other three options we just covered because you need to hit a loan-to-value (LTV) threshold, go through a full underwriting process (similar to a mortgage), and pay the registration fees and closing costs. And they’re risky too: if you default on payments, you could lose your home to a foreclosure sale.
Rather than taking out a home equity loan or HELOC, Joy suggests refinancing to take advantage of historically low interest rates if you have good to excellent credit. The free cash flow from a lower interest rate or a shorter repayment period can be offset against your debt.
4. Debt management plans
If you feel like you are underwater with debt, it can help to seek help from a nonprofit credit counseling agency. Credit counselors can help you budget, negotiate the terms of your debt with your creditors, and decide which loan or credit card should be preferred. We recommend reaching out to agencies supported by the National Foundation for Credit Counseling.
This is how you avoid vacation debts in the next season
Vacation debt is not inevitable. While the pressures of decorating, buying gifts, and traveling can be high, there are ways to cut your budget without sacrificing the joy of the season.
1. Talk to your family about giving
Having gifts for everyone in the family can make you feel like Santa Claus for the day, but it just isn’t doable for a lot of people – especially those with large families.
Joy says she felt that pressure when she went to her grandfather’s house on Christmas Eve, where up to 30 family members gathered. “Nobody ever said it, but it goes without saying that everyone should be given a gift.” For a year she proposed an organized secret Santa Claus gift exchange among adults instead of the typical one-gift-per-person Tradition – and the proposal met with broad approval and relief.
People are often scared of rocking the boat for fear of looking like the Grinch, but you may find that you aren’t the only person who is overwhelmed. Joy says: “Let’s normalize talking about giving.”
2. Plan all year round
After Thanksgiving, many people look for the money to buy gifts, but it doesn’t have to be.
“A lot of people plan a summer vacation budget but forget to include gifts along the way,” says Blackwell. By incorporating this huge expense into your monthly budget – and even adding the money to a separate savings account – you can avoid debt. Saving consciously also means that you may be able to purchase a bigger, more expensive gift for a loved one instead of scrolling through Amazon at the last second or wandering through Target.
3. Resist the siren call of advertisements
If you are tempted to spend too much money, know that it does not come from a moral weakness. “It’s on purpose,” says Joy. “A lot of people are supplied with gas on the holidays. When you are asked to buy, buy, buy … literally everywhere you go, you have to realize that this is happening. “
Rather than messing around with relentless Christmas commercials, Joy says realizing can instead be empowering. “You have more power to say no than you realize.”
