So, you spent more money during the holidays than you planned. And not only did you overspend, you used credit cards or personal loans to finance the purchases. What follows is tips on what you can do to help pay down extra holiday debt this year, from myFICO.
For more loan and credit education, visit myFICO’s blog at https://www.myfico.com/credit-education/blog
As January rolls around, you may start to regret the extra debt you took on at the end of last year, yet feelings of buyer’s remorse won’t solve financial and credit problems. What you need is a plan to deal with the debt. Here are three strategies that might help you.
1. The Debt Snowball or Avalanche Method
The debt snowball and the debt avalanche are two similar strategies that could help you tackle extra holiday debt. With each strategy, you start by making a list of the debts you want to pay down. Write the names, balances, and interest rates of each account—especially credit cards and high-interest loans.
A debt snowball list starts with the account that has the smallest balance. From there, you work upward.
Debt Snowball Example | |||
Payment Order | Creditor | Balance | APR |
Pay First | ABC Bank | $500 | 15.9% |
Pay Second | QRS Bank | $2,500 | 18.9% |
Pay Third | XYZ Bank | $5,000 | 17.9% |
Alternatively, the debt avalanche method’s payoff order is based on each account’s interest rate—from highest to lowest.
Debt Avalanche Example | |||
Payment Order | Creditor | Balance | APR |
Pay First | QRS Bank | $2,500 | 18.9% |
Pay Second | XYZ Bank | $5,000 | 17.9% |
Pay Third | ABC Bank | $500 | 15.9% |
Next, look for any extra money in your monthly budget. You can apply those funds toward either the account with the smallest balance or toward the one with the highest interest rate. The account you pay first depends on the approach you choose (snowball or avalanche). Either way, you must make at least the minimum payment on every account on your list to avoid late payments.
Both debt elimination strategies have benefits. The debt snowball method may lower the revolving utilization ratio on individual credit cards faster. You may also reduce the number of accounts with balances on your credit reports. Either move could potentially have a positive impact on your FICO Scores. The debt avalanche method, by comparison, might help you spend less money on interest fees.
2. Balance Transfer Credit Card
It may take time to pay down new holiday debt, even if you use one of the payoff strategies above. And if holiday overspending added to a pre-existing debt problem, you could be in for an even bigger challenge.
When you can’t afford to pay off your high-interest debt right away, a balance transfer can sometimes be a helpful solution. A balance transfer is the process of using one credit card to pay off another.
Balance transfers often feature 0% APR or a low introductory interest rate on the debt you transfer over to your new account. The special APR lasts for a limited time—often 12 to 18 months. If you can afford to pay off a good portion of your debt during the promotional period, a balance transfer offer might save you a considerable amount of money. However, there are some potential downsides to balance transfers that you should consider as well.
A balance transfer could potentially make sense in the following circumstances:
- You have a good FICO Score and clean credit history.
- You qualify for a promotional offer with a lower interest rate than you’re paying on your current credit cards.
- Any balance transfer fees the card issuer charges won’t wipe out the potential savings from the introductory APR.
This free myFICO calculator can help you crunch the numbers to see if using a balance transfer offer to consolidate your existing debt is a good fit for you.
3. Debt Consolidation Loan
A debt consolidation loan is another financial tool that might help you pay down the extra debt you picked up over the holidays. Similar to a balance transfer, you can use a consolidation loan to combine existing debts into a single account. Yet, instead of moving your debt to a new credit card, you’re moving it to an installment loan.
Again, you’ll likely need a good FICO Score and clean credit history to qualify for a consolidation loan with a competitive interest rate. (Note: Each lender decides its qualification criteria for itself.) But if you qualify for a consolidation loan with a lower interest rate, it might help you save money and get out of debt faster.
A consolidation loan might lower your credit utilization ratio if you pay off revolving debts with an installment account. Lower utilization rates can potentially benefit your credit scores.
Remember to choose wisely which debts you include in a new consolidation loan. For example, you might want to exclude loans with only a few more payments remaining. This free myFICO calculator can help you determine whether a debt consolidation loan might be a smart choice for your situation.
Keep in Mind
Only you can decide which approach is best when it comes to dealing with extra holiday debt. But you should aim to pay down those new balances as quickly as possible.
Whichever debt elimination strategy you choose, paying all of your credit obligations on time is key. Even the occasional late payment will impact your credit scores. You should also avoid charging up balances again on your freshly paid-off accounts. Otherwise, that holiday debt problem might evolve into a true financial and credit crisis in the future.
About myFICO
myFICO makes it easy to understand your credit with FICO® Scores, credit reports and alerts from all 3 bureaus. myFICO is the consumer division of FICO– get your FICO Scores from the people that make the FICO Scores. For more information, visit https://www.myfico.com.
