Credit Hack 1: Pay off that holiday debt
Still revolving holiday credit card debt? Chances are, you’re not alone.
In the U.S., average credit card debt increased about 3.5 percent from November 2013 to January 2014, according to a Bankrate analysis of Experian data.
But don’t take solace in the fact that other consumers are probably still paying for the holidays, too.
It’s in your best interest to pay off all your holiday purchases as soon as possible. High credit card balances will negatively skew your credit utilization rate — essentially how much credit you are using versus how much collectively has been extended to you — which, in turn, will hurt your credit score.
Fortunately, there are some strategies that can help keep those pesky holiday purchases from ruining your new year and tainting your credit report.
Attack those balances
First, refrain from putting more purchases on your credit cards.
“Just try to use cash and your debit card as much as you can,” while paying down existing debts, says Kevin Weeks, president of the Association of Independent Consumer Credit Counseling Agencies.
Next, prioritize payments. The most cost-efficient method for getting rid of your debt involves paying the minimum on your lower interest rate cards in order to put all the other funds you can toward the card with the highest annual percentage rate, or APR.
Alternately, you could pay off your smallest balance first, because “it’s easy to lose motivation if you don’t see yourself getting anywhere,” says Thomas Nitzsche, a certified credit counselor with ClearPoint Credit Counseling Solutions.
Which method you should utilize ultimately “depends on what works best for you … and how big of a spread” there is between your cards’ APRs, Nitzsche says.
However, if you do opt to pay down a small balance over a debt that may be more expensive, call your issuer to see whether it is willing to lower the higher APR in order to keep debts from burgeoning faster.
“Don’t expect them to do it on the first call,” Nitzsche says. “You might have to call them more than once.”
Getting more dollars for debt
In an effort to expedite paying down balances, look for ways to increase your income or reduce spending.
“There is a lot that (most people) can do within their monthly budgets to reduce their expenses so they can save more,” says Robert Stammers, director of Investor Education at the CFA Institute.
For instance, cut back on nonessentials, like your morning latte or a premium cellphone plan. Forgo a big family vacation and shop around for new homeowner, auto or health care insurance policies.
“You might find a competitor out there that will give you a better deal,” Stammers says.
When it comes to bringing in more revenue, you could consider taking a side job, but don’t be afraid to get creative.
“EBay and Craigslist are a garage sale opportunity for you constantly,” Weeks says. “If you have things that you don’t use or don’t want, it’s very easy to take a picture of those things and sell them online.”
Just say ‘no’
Whatever you do, avoid taking out, say, an equity or payday loan to pay down existing credit card balances.
“Those are things that can really get people in trouble and add even more debt,” Weeks says. Also, refrain from dipping into your retirement savings, which carries tax penalties. Be similarly wary of relying solely on a balance transfer credit card offer to assuage your debt woes.
“Balance transfers can be helpful,” Weeks says, but “people have to be careful with (those offers), too, because you’re just moving the debt around.”
Plus, some balance transfer offers contain caveats that may make the cost of transferring a balance more expensive than revolving the same balance on the original card. So, at the very least, be sure to carefully read all terms and conditions.
Look ahead to next year
The real trick regarding holiday debts involves not accumulating them in the first place.
If you are continually carrying over balances from year to year, plan to “take a break from Christmas and just do an exchange” in 2015, Nitzsche says.
If you don’t want to forgo gift-giving, do some holiday shopping throughout the year to avoid running up a big credit card balance in December. Alternately, let your credit card rewards or cash back accumulate.
These reserves can help drive down holiday expenses because points, miles and cash back can be put toward holiday gifts, travel and other ancillary costs.
Also, consumers who tend to wait for the big tax refund to pay off an existing balance might want “to change their exemptions on their taxes in order to take more of what they earn” home during the course of the year, Nitzsche says. Securing more funds earlier could pre-empt balances from running back up next year.
“A lot of it is just breaking the cycle,” he says.
Stay tuned for next month’s credit card tip.