Managing the Christmas credit card hangover
It’s that moment in the New Year that so many Australians dread – the credit card statement that clearly spells out how much you’ve spent at Christmas.
Many consumers get caught up in the Christmas spirit and arrive in the New Year with credit card balances they simply can’t pay off.
If you’ve woken up to the holiday debt hangover, you should focus on avoiding high interest charges, which are often much higher on credit cards, by clearing the debt as quickly as possible. If you can, clear the balance completely when due, but if you don’t have savings or the cash flow to do this, then investigate alternatives such as refinancing the debt at a lower interest rate.
Some might have the capacity to redraw on their home loan, where the interest rate is much lower than a credit card, or consider taking out a personal loan. For this strategy to succeed it is vital for consumers to increase loan repayments so the credit card portion of the owed amount is cleared as quickly as possible. Make a mini budget that allows you to repay the holiday debt over a few months, otherwise you wind up stretching a $2000 debt over a 20-year home loan, which will cost more in interest and extend the life of the debt.
While you’re clearing the balance, be careful about how you use your credit card and only spend what you can afford to repay at the end of the month.
If you’re facing back-to-school expenses, then take advantage of any interest-free period on your credit card, provided you can pay the outstanding amount at the end of that period. If you don’t think you can do this, consider cheaper sources of credit, such as the home loan, but like the Christmas debt, you need to increase your repayments.
While clearing the 2011 debt, consumers should also focus on preparing for the 2012 festive season. If you have landed in January with a nasty credit card debt, the important thing is to avoid the same thing happening next year.
So if you know that you usually spend, say, $1500 at Christmas, then set up a Christmas savings account where you make a $30 weekly deposit and are discouraged from withdrawing funds early.
By preparing a plan and sticking to it and spreading the cost over the year you can avoid the pain of a large lump sum cost at Christmas.
^Wayne – Chief Financial Officer