By Andrew Housser
Picking out the perfect holiday present for loved ones can fun. Yet, it's painful if the sting of holiday overspending lingers into the next year. If you still remember (or feel) the financial pinch from charges you racked up during last year's Black Friday, follow these strategies and ditch that debt before this holiday season is in full swing.
1. Come up with a payment plan.
It feels great to pay off a debt, regardless of how small the amount. Start by putting as much as you can toward your smallest debt while making minimum payments on all others. Once that small debt's gone, add the amount you were paying on it to the minimum you have been paying on the next smallest debt until it is paid off. Repeat this process until you are debt-free. Research has shown that this method -- "the snowball method" -- can be the most effective way to pay off debt for many people, because it feels great to close out a balance. But if you are carrying debt with a sky-high interest rate, you might wish to focus on paying it off first to prevent overpaying in interest (the "avalanche" method). Whichever method you choose, making a plan can make it happen.2. Dip into your savings.
It is smart to have extra cash in reserve, and you should not deplete your emergency savings fund. Yet, it also is senseless to have money in the bank earning a return of less than 1 percent while credit card companies are charging 15 percent interest or more on your debt. In these circumstances, using a portion of your savings to pay off a high-interest card can be a good move. 3. Reduce expenses.
Comb through your monthly expenses and look for ways to save dollars. Can you split the cost of gas and carpool to work? Make your coffee and lunch at home and forego the drive-through? Scrutinize your utility bills to see what extra services you can live without, such as caller identification or specialty cable channels. Start differentiating wants from needs, and the savings can add up dramatically.4. Negotiate with creditors.
Talk to your creditors about your financial situation to see if you can reduce your interest rate, minimum payment or both. See if they will match any lower-interest offers that you may have received from other credit card companies. Most creditors would rather work out payment plans than lose money completely. They also don't want you to take your business to another creditor.
5. Get help if you need it.
If you realize you absolutely cannot pay your debt by yourself, now is the time to get help. Depending on your individual situation, you might benefit from a consumer credit advocacy firm that can advise on the debt relief options.
- Debt management plans, which credit counseling firms offer, speed up the time it takes to get out of debt by lowering interest rates, but there are some drawbacks. You will no longer be able to use the credit accounts. You will most likely pay an enrollment fee and monthly fees. These plans do not lower total principal due.
- Debt settlement plans reduce principal balances due. They can sometimes reduce total unsecured debt owed by almost half. But because you do not make payments directly to creditors while you go through this process, delinquencies can appear on your credit report, which lower your credit score. You also may receive calls from creditors. Reputable firms should not charge you a fee until after they have finalized a settlement for you, and should help you through the process.
- Bankruptcy, generally viewed as a last resort, may be helpful for those in very serious debt situations for whom debt relief services cannot be of help. Be sure to discuss with a bankruptcy attorney licensed in your state.
If you cannot wipe the financial slate clean before the start of the New Year, you can feel better knowing that you are on the right track. Keep it up. Do not allow yourself to get so caught up in the holidays that you revert back to bad spending habits. This is the best gift you can give yourself.
Andrew Housser is a co-founder and CEO of Bills.com, a free one-stop online portal where consumers can educate themselves about personal finance issues and compare financial products and services. He also is co-CEO of Freedom Financial Network, LLC providing comprehensive consumer credit advocacy and debt relief services. Housser holds a Master of Business Administration degree from Stanford University and Bachelor of Arts degree from Dartmouth College.