Taking
Control of Your Debts at Holiday Time
Blinking
lights, joyous children, glitzy parties, and gifts galore. Yes, the sights and
sounds of another holiday season are upon us. And for many Americans, the
holidays mean one more thing -- the balances on millions of credit cards are
about to go way up. If, in the process of spreading good cheer, you charged too
many purchases, consider the following advice about paying down credit card
debt.
Determine
How Much You Owe
The first
and most essential step in any debt management effort is to stop using your
credit cards. You'll never be debt free if you continue to use and abuse your
credit cards. The next step is to figure out how much you owe and to whom.
Gather all your credit card statements and list the total amount you owe on each
card, along with the interest rate and the minimum monthly payment. Sit down,
grab a calculator, and total it up.
Retool
Your Budget
If you don't
like what you see, you will need to make some temporary sacrifices to accomplish
your goal of paying down your debt. List your monthly take-home income and all
your expenses, and analyze both. Then, look for areas where you can trim
expenses. For example, you might consider dining out less often, renting videos
instead of going to the movies, or postponing a major purchase.
Some people
can go cold turkey and spend money only on essentials and debt repayment. For
others, modest cuts work better. Whatever works for you, come up with a doable
repayment plan and make a commitment to stick to it.
Restructure
Debt To Reduce Interest
It's a good
strategy to concentrate on paying off the highest interest rate debt first. An
even better strategy would be to transfer your largest, high-rate balances to a
credit card with a lower rate. This will reduce the amount of money you spend on
interest, which means you can pay off your balances sooner. One word of caution:
some card issuers offer low rates that jump to much higher rates after six or
twelve months. If you transfer to one of these cards, make sure you're ready to
move again when the rate increases.
You might
also consider refinancing your mortgage or applying for a home equity loan or
line of credit. In addition to interest rates significantly lower than what
credit card issuers typically charge, for most taxpayers, this borrowing option
has the added benefit of tax-deductible interest. But keep in mind that if you
default on the loan, you could lose your home. Consider this option only if
you're sure you can meet the payments.
Make A One-Shot Reduction In
Your Loan Balances
Devote as
much of your financial resources as possible to paying off your credit card
balances. Withdrawing savings from low-interest savings accounts to pay off
high-rate loans almost always makes good financial sense. U.S. Savings Bonds or
a cash-value life insurance policy can provide the added cash you need to get
you out of the debt trap. So can a bonus or inheritance. If you're expecting a
tax refund, file early. The sooner you file, the sooner you can get your refund
check and apply it to your debt repayment plan.
Contact Your Creditors
If you're
unable to pay lenders on time, be up front with them. Tell them what the problem
is and how much you think you can pay each month, and work with each of them to
arrive at an acceptable payment schedule. Keep a record of any calls to
creditors you make, noting the date, with whom you talked, and any arrangements
made.
If you
continue to have difficulties, you may need to seek outside help. Head for the
nearest non-profit credit counseling service, which you can find by calling the
Consumer Credit Counseling Service at (800) 388-2227. For a modest fee, a credit
counselor will review your debts and your ability to pay them and help you set
up a supervised payment plan.
Follow
Santa's Lead
Plan for
next year. Make a list and check it twice. Consider each person for whom you
will be buying a gift. Also estimate holiday-related expenses, such as travel,
special clothing, and decorations. Then determine how much you need to put away
each month to cover next year's holiday expenses. If it adds up to more than you
can put away, trim your list and you'll avoid falling into the same debt trap
next year.
Once you
work your way out of credit card debt, use only one or two cards and charge only
what you know you will be able to pay off at the end of the month.