We all set out with good intentions. We have a budget that we intend to stick to for the holiday season and a list of all the people that we need to buy presents for. Sometimes, however, life isn't that simple and doesn't go to plan. Unexpected costs arise and, before you know it, you've spent more than you intended to and have wrung up some debt on your credit card or overdraft.
This is especially true at Christmas, when there is immense pressure to splash out to buy gifts for others and to entertain guests with all the attendant costs that go with that. Many of us, too, are far too generous and spend beyond what we can comfortably afford to. Whether you've spent too much money on yourself or other people, the simple truth of the matter is that the added expense is going to come back to bite you. What, then, can you do to successfully manage the holiday debt that you've accumulated?
The first thing to do is to sit down and review your debt position. Sometimes people in debt are reluctant to face up to the bills but burying your head in the sand won't make the problem go away. How you manage your post-holiday debt will depend on the scale of debt and your individual financial position. If the debt you've accumulated is fairly modest, and you have savings, then you may be able to pay all the debt off immediately in one go. If this is feasible, this will be the most prudent approach as it will minimize the amount of debtor interest (and charges) that you end up paying. However, if it isn't feasible to pay off your debt immediately, then you will need to work out a repayment plan.
Deciding on a debt repayment plan:
Your objective, in dealing with debt, should be to pay off the outstanding debt as soon as is feasible and to ensure that you pay off the most expensive debt first. This latter point is important as it flags up that not all types of debt are the same. We'll take a moment now to briefly run through the main types of debt that people typically end up with.
The most common scenario is that we put most of our costs onto a credit card or, in some cases, onto more than one credit card. We know that, by doing so, we won't have to pay at the time of purchase but rather at a later point. This "buy now, pay later" mentality, however, can be very damaging to our finances and it's important, therefore, to reduce and pay off that credit card debt in the minimum amount of time.
Another possibility is that the debt is accumulated on an overdraft. Overdrafts fall into two categories, authorized and unauthorized. An authorized overdraft is where the bank has agreed that you can lend up to a certain limit on your checking account / current account. As long as you don't exceed that limit, you will typically avoid bank charges but you will need to pay back interest on the amount borrowed. An unauthorized overdraft is where you go into the red without agreement from the bank and is much more serious. It will attract heavy charges, a higher rate of interest and will damage your credit score.
In general, authorized overdrafts have a lower rate of interest than credit cards although, of course, there are sometimes credit cards deals that are very competitive and may be less costly than your overdraft. Unauthorized overdrafts are nearly always extremely expensive and to be avoided at all costs.
You will need to assess where your debt is and then look at the interest rates that your debt is attracting. With this knowledge, you can then determine the optimal prioritization order for repaying the debt.
Some additional points to note:
If you've gone into an unauthorized overdraft position, then the best approach would be to pay off the outstanding amount, thus bringing your account back into credit or, at least, within the limits of an existing authorized overdraft. However, there will be occasions where this is simply not practicable in such a short space of time. Another option, therefore, is to speak to your bank and ask them if they will extend your authorized overdraft and possibly waive the unauthorized overdraft charges. Your chances of getting this leeway will depend largely on how good your past record with the bank has been and on your ability to explain to the bank how you intend to repay the money, so that they have confidence that this approach will be helping rather than exacerbating the situation.
Where your debt is split across more than one credit card, then make sure that you prioritize the one with the highest rate. In general, the advice with credit cards is always to pay off the outstanding amount in full every month. Setting up a direct debit is one way to ensure that this happens. However, again, we need to live in the real world and appreciate that this won't be possible for many households. The answer then is to make sure that you pay more than the minimum stated amount, and as much as you can afford. Many credit card customers make the cardinal mistake of only ever paying back the amount that the credit card company has stated as the minimum required payment. This then leads to you paying interest on interest and can spiral into a complete disaster. Another option to consider is whether you should switch to another credit card that offers an interest-free period or that has a lower underlying interest rate. These steps can create some breathing space to help you bring your credit card debt under control.
If you have debt spread across various credit cards and/or overdrafts, then it may be appropriate to consolidate all that debt onto one personal loan. The benefit of this is that personal loans typically have lower interest rates, so it may help reduce the total amount that you will need to pay. However, loans also have fixed monthly payments and you will need to stick to those payments in a disciplined fashion.
Reduce your spending until you've paid back your debt. That may mean that you will have to do without your annual January sales shopping spree.
How to fund the debt repayment:
I've outlined how we should prioritise debt management but knowing how to manage debt is no good unless you actually have the funds to make the payments. There are two ways of increasing the amount of money that you have available to make debt payments; these are to either increase your income or reduce your costs.
In the current economic climate, it may be difficult to persuade your boss to give you a pay rise, but there may be alternative ways to bring in some extra money in the short term. You could volunteer to work overtime if there's a need within your company for extra work to be done. Alternatively, you could sell stuff on ebay or write articles for Helium. We often have plenty of stuff lying around the house that we no longer need but have never got around to binning. If it has value, then it makes sense to sell it. If you aren't sure about using online websites, then you could always have a car boot sale.
However, it's usually easier to increase our disposable income through cost cutting rather than by bringing in extra income. A separate article could be devoted to how to reduce your costs, so I don't intend to go into this topic in great detail here. However, suffice to say, that there are usually lots of opportunities for households to reduce their monthly expenditure. A good starting point is to review your recent bank statements and see what you've been spending money on. The chances are that there will be plenty of non essentials (such as magazine subscriptions) that can be eliminated, at least for the short term.
Summary:
Holidays and, in particular, the Christmas / New Year holiday period can be hard upon our wallets. Often, we find that we've spent much more than we'd intended to, even though we set out with the best of intentions and with a planned budget. If you find yourself in a position of having run up some debt, then hopefully you will be in a position to pay it off immediately after the holiday. However, if repaying the debt is going to be more problematic, then don't panic and don't bury your head in the sand. Instead, sit down and review your financial position and work out what items need to be prioritized. If necessary, speak to your bank as it may be in their interests to help you recover your financial position. To help finance the debt repayments, look for opportunities to bring in some additional income but be aware that the best opportunity is often to reduce short-term costs.
Hopefully, you will soon be back on an even financial footing and will have benefited from this learning experience. Indeed, it may be beneficial to think ahead to the next holiday season and plan how you are going to do things differently so that you don't find yourself in the same position again.
Some additional reading:
I mentioned that there wasn't space in this article to go into detail about how to reduce costs. The same is true about how to bring in extra income. However, if you are interested in reading more on these topics, then don't worry because Helium has plenty of articles on these topics! Below I've listed a few that may be particularly useful.
- Saving money:
http://www.helium.com/items/12 54851-how-to-save-money-and-re duce-bills-and-costs
http://www.helium.com/knowledg e/4917-best-ways-to-save-money
- Making extra money:
http://www.helium.com/items/12 54301-way-to-earn-a-little-ext ra-money
http://www.helium.com/knowledg e/134589-fast-and-easy-ways-to -make-extra-money