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Dig yourself out of holiday debt

Two years ago, Angelina Fortini was $400 in debt after buying the perfect Christmas gifts for everyone on her list. "I felt like I should get everyone something equally good," says Toronto-based Fortini, who has since learned her lesson. Although her debt was tame, she now creates a holiday budget to ensure she doesn't spend more than she can afford.

Fortini is not alone. "People get really caught up in the spirit of Christmas and feel they need to spend money to show they care," says Laurie Campbell, executive director of Credit Canada in Toronto. According to a Royal Bank of Canada survey released in November, Canadians expect to spend $1,137 on the holidays including gifts, decorations, entertaining and travel.

For those holiday shoppers who have yet to learn their lesson -- or simply can't pass up giving like Santa year after year -- here are five foolproof tips for digging yourself out of holiday debt.

Tip No. 1: Face the music
Don't panic, says Campbell. It's very easy to get overwhelmed when realizing you may have blown your budget. "Open up all bills and determine the total amount outstanding," she says, adding it's important to involve your partner or spouse in the process so that you can work together and create a plan of action. Then, review your financial goals to determine how soon you want to be out of debt and what payments you'll need to make to achieve this, she says.

But there is hope. "I've seen clients, once they have taken a hard look at the damage done from their holiday spending, go from debt-laden to debt-free in a reasonably short period of time," says Jeffrey Schwartz, executive director of Toronto-based Consolidated Credit Counselling Services of Canada.

Tip No. 2: Pay off your credit card bill in smaller increments
"A lot of people aren't aware that you can make a payment on your credit card ten times a month if you want to," says Doug Frain, a certified financial planner in Burlington, Ont. "Each time you make a payment, it's getting credited as of that date so you're saving interest, especially if it's a high-interest credit card at 28 per cent." Instead of waiting until the due date to pay it off, make smaller payments every time you get paid, says Frain.

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Tip No. 3: Prioritize your credit card debt
If people have one credit card that's at 18 per cent interest and then they have another credit card at 3 per cent, then what they really want to do is pay the minimum on the lower interest credit card so they can focus on the one with the higher interest, says Frain. And keep in mind: Store credit cards are usually around 28 per cent.

Credit cards should be paid off as quickly as possible, says Campbell. "If you cannot pay them off right away, ideally you should be putting in more than the minimum payment to avoid long term repayment and high interest rates."

Tip No. 4: Make a budget
It's never too late to budget. Make a list of monthly bills, including groceries, says Frain. "Use cash for everything other than those bills that come out of your account automatically," he says. "And leave your credit cards at home." But most importantly, keep in mind that you are paying for things you already have. Therefore, don't make any new purchases until your existing purchases are paid for, says Frain.

Campbell echoes this sentiment. Once you find yourself in debt, she says to track your expenses for a couple of weeks to determine exactly where your money is going. It's also a good idea to determine what monthly expenses can be reduced or eliminated, says Schwartz.

Tip No. 5: Get planning early for next Christmas
"Plan for Christmas early in the New Year so you can save up," says Campbell. "Take advantage of huge discounts after Christmas on decorations and wrapping paper." And start rewiring the way you think about your budget. Consider the full cost of Christmas -- which is not only gifts but decorations, extra food, extra alcohol and outfits, she says. "By considering all the costs, you can plan more appropriately."

And there is no such thing as planning too early. "We have always stressed to start a year in advance for holiday spending, but we also know that does not always happen," says John Eisner, president of Credit Counselling Services of Atlantic Canada Inc. in Saint John, N.B.

But people don't get into financial trouble only over the holidays, says Frain. "It's the habits and the tendencies that they have long before that and the fact that they probably had zero savings to fall back on." Or, he says, shopping without the money was already a habit, and so, the holidays were only the tipping point that pushed them over the edge. Keep your spending habits in check throughout the year to avoid having to dig yourself out of holiday debt at the year's end.

Vanessa Santilli is a freelance writer in Toronto.

-- Posted December 22, 2010
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