5 Steps to Get Out of Holiday Debt Faster
If you started the New Year with some extra credit card debt, you might be feeling anxious if you can't pay it off in full. Instead of getting stressed, follow Laura's 5 steps to get out of post-holiday debt faster so you take control of your finances and move in the right direction. Click here to listen to the audio version and subscribe to the Money Girl Podcast so you never miss a weekly episode.
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If you started the New Year with some extra credit card debt, you’re not alone. Maybe you threw a party that cost more than expected. Or you sprang for a lavish family dinner, expensive presents, or a few additional purchases for yourself while you were shopping.
High credit card balances can cause a lot of anxiety and stress when you can’t pay them off in full. Amounts you carry from month to month result in higher interest charges and bring down your credit scores, which negatively affect many areas of your financial life.
In this article, I’ll cover 5 steps to get out of post-holiday debt faster so you take control of your finances and move in the right direction.
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5 Steps to Get Out of Holiday Debt Faster
Schedule time with other stakeholders in your financial life, like a spouse or partner, to go through each of the following steps to eliminate debt from the holidays:
Step #1: Review your financial situation
Before you can solve a problem, you need to take stock of the situation. The best way to get a bird’s-eye-view of your finances is to create a document that I call your Personal Financial Statement (PFS). I recommend that you create your PFS and update it monthly as you focus on paying down debt.
To create your PFS, make a list of your assets and their current values, such as your bank accounts, retirement accounts, investing accounts, real estate, and vehicles. Then list your debts and the balance owed for mortgages, car loans, student loans, and credit cards. Include the interest rate you’re paying for each debt so you know which ones cost the most on a percentage basis.
When you subtract your total debts from your total assets, you’ve calculated your net worth. For instance, if you have $200,000 in assets and $190,000 in debts, your net worth is $10,000.
It’s important to track your net worth over time so you know if you’re building wealth or losing it.
It’s important to track your net worth over time so you know if you’re building wealth or losing it. You increase wealth by increasing assets (like emergency savings and retirement accounts), shrinking debts, or ideally, doing both at the same time.
Step #2: Make a debt payoff plan
Once you have a list of all your debt names, amounts, and interest rates at your fingertips, you’re ready to create a strategy to pay them down. Here are some ways to approach your payoff plan:
- Create a debt deadline, such as getting rid of your extra holiday debt load within 90 days. Simply divide the amount you racked up by three to determine how much extra you need to pay monthly over the next three months. For a longer-term plan, your card statement shows how much you must pay to wipe out the balance in 36 months—if you make no additional charges.
- Target the smallest debt amounts first regardless of interest rate. Let’s say you owe $1,000 on a credit card that charges 12% and $5,000 on one at 19%. You might enjoy a great sense of accomplishment and momentum by wiping out the $1,000 debt first. Then you’d move on to the next highest amount. However, for larger balances, I recommend the next strategy.
- Target the highest interest rate debt amounts first regardless of amount, which is known as laddering. For instance, if you owe $15,000 at 22% and $8,000 at 12%, you’d pay off the 22% rate card first because it’s costing you the most. Getting rid of debt in order of highest to lowest interest rate makes the most mathematical sense because you save more interest over the long run.
- Create a combo debt strategy that uses any of these plans. For instance, you might commit to paying off a relatively small, low-interest debt over three months to get a quick win—and then turn your attention to your highest-interest debts.
If you target the highest interest rate debt first, you could pay double or triple the minimum payment, or whatever you can afford. Or you could set a flat amount to pay, such as $500 or $1,000, while continuing to make minimum payments on your other cards.
No matter which debt payoff plan you choose, be as aggressive as possible and stick with it. Once you zero out a balance, be cautious about closing a credit card because it can hurt your credit.