Updated June 02, 2020

How to Pay Off Christmas Debt: 6 Tips to Dig Yourself Out

Getting Out of Debt

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We all want to stay on budget, but it’s easy to go into debt during the holiday season.

While avoiding debt is obviously better for your financial health, you can pay off debts surprisingly quickly with the right strategies.

This article will cover everything you need to know in order to pay off Christmas debt as quickly as possible.

Becoming debt-free will free up cash flow and help you focus on the rest of your financial goals.

No matter where you are now, getting started is the most important step.

1. Resolve to Pay Off Your Debt Quickly

Yes, it’s tempting to pay off debt by simply making minimum payments until it’s gone.

While this is arguably more convenient, it’s never the best financial strategy for getting out of debt.

Making just the minimum payment will keep you in debt for a longer period of time.

You’ll also spend far more in interest compared to paying off the balance more quickly.

So here’s what you need to do: resolve to pay off your holiday debt as quickly as possible, especially if most of it is at a high interest rate like credit card debt.

Aside from critical items on your budget like 401(k) matches and an emergency fund, paying off high-interest debt should be one of your top financial priorities.

Isn’t the Minimum Payment Enough?

Every additional dollar you pay off now is another dollar that won’t accrue any interest.

If you double the minimum every month, for example, you’ll end up becoming debt-free in less than half the time compared to making just the minimum payment.

At 20 percent interest, for example, it would take you 67 months to pay off a $1,000 debt making a $25 payment each month.

Including interest, you would end up paying $1,661 just to overcome a $1,000 debt — in fact, roughly 40 percent of your payments would be going to interest.

On the other hand, doubling that payment to $50 per month on the same balance would allow you to become debt free in just 25 months, and you would pay “only” $226 in interest, approximately one-third of the $661 you would pay if you only paid $25 per month.

Doing the Math

Calculating accumulated interest and your time to become debt-free can help you understand exactly what you need to do to pay off any debts.

Use this credit card calculator to get a clear sense of your financial situation and project how much time it would take to become debt-free with different payment plans.

Keep in mind that minimum payments aren’t intended to help you.  Credit card companies have an incentive to collect more interest.

Making less than the minimum payment can lead to significant penalties, but it’s almost always better to pay more than the minimum whenever possible.

In fact, ideally, you would be paying off your credit card balance every month.

2. File Your Tax Return in January

If you usually get a tax refund, then filing your tax return ASAP to get that refund can provide you with extra cash to pay off that holiday debt.

When Is the Earliest that Tax Returns Can Be Filed?

Most mainstream tax return preparation software becomes available some time during December, with the ability to actually file your returns coming a few weeks later, typically in early January.

A large tax refund can help cover all kinds of expenses, and receiving it as early as possible makes it easier to avoid interest on accumulated holiday debt.

Refund Advances

Also keep in mind that a growing number of tax services are now offering tax return advances that give you access to your money at no additional cost.

It’s important to distinguish tax return advances from previous alternatives which charged a substantial amount of interest.

These new programs no longer come with interest, and they’re available from several companies including TurboTax and H&R Block.

You could get early access to your refund in as little as 24 hours.

Of course, these businesses aren’t charities, and they don’t exactly offer tax return advances for free.

You can only access this perk if you have that company prepare your taxes, which generally costs money unless you have a very simple return.

A Word About Tax Refunds

Also, I would be remiss to not at least mention that getting a tax refund means you essentially gave the government an interest-free loan, so if you really want to level up your finances next year, consider adjusting your tax withholdings so that you have that cash at your disposal throughout the year rather than all at once during tax season.

The hard part, of course, is to not spend that extra money coming through in your paycheck every month but rather to put it toward your debt.

3. Attack Your Debt Strategically

Paying off a single debt is relatively straightforward, but things get more complicated when you’re managing multiple balances.

And this may very well be the case if you used various store credit cards in addition to other cards to do your Christmas shopping.

In this case, you need to determine which debts to focus on whenever you have extra money.

Of course, you should always make at least the minimum payment on every balance, but there are several schools of thought when it comes to prioritizing one debt over the other to pay more than the minimum on.

While no specific recommendation is best for everybody, sticking to a single strategy can help you reach your goals more efficiently.

It’s also easier to maintain your motivation when you have a unified plan for getting out of debt.

Debt Snowball

One recommended way of managing debt is to use the debt snowball.

The debt snowball advises paying off the smallest balances first.

By emphasizing the size of the debt, this approach focuses on the psychological side of becoming debt-free.

If you’re worried about losing your momentum, you may be more likely to stay committed if you feel like you’re making progress every time you eliminate one of your smaller debts.

With that in mind, the debt snowball is perfect for people who need some extra motivation as they start paying off debts.

Sticking to financial plans can be incredibly difficult, so don’t underestimate the importance of a debt payment plan that keeps you invested financially, emotionally, and psychologically.

Debt Avalanche

An alternative to the debt snowball is the debt avalanche, which targets interest rather than size, and it’s the most cost-effective way to get out of debt.

Instead of going from smallest to largest, go from the highest to the lowest interest rate.

Since interest accumulates much faster at a higher rate, you’ll minimize the interest you pay in the long run by going this route.

In short, the debt avalanche is the best way to get out of debt with the least amount of money.

If you’re confident that you’ll be able to maintain your momentum either way, there’s no reason to pay more interest by using the debt snowball.

Of course, these aren’t the only two ways to approach paying off multiple balances, and you may want to pursue a mixed approach by employing the snowball method on a regular basis but putting windfalls like your tax refund toward your debt with the highest interest rate.

Or maybe cash flow is more important to you than interest or debt size, and targeting your debts in order of their monthly payment may best help you meet your particular budgeting goals.

In the end, the best strategy is the one that works for you.

4. Consider Debt Consolidation

While there are a number of effective ways to pay off multiple debts, debt consolidation can be extremely helpful.

Unfortunately, you may not have access to as many options if you also have poor credit.

As the name implies, debt consolidation is intended to move several balances into one debt.

From there, you can cover them all with a single payment at — hopefully! — a lower interest rate.

That said, you can also use debt consolidation to transfer one debt rather than multiple.

Debt Consolidation Loans

Debt consolidation loans are the most obvious way to approach consolidating debt, and they’re often highly affordable.

If you’re dealing with credit card debt, a debt consolidation loan could reduce your interest rate enough to make a real difference in your financial life.

Again, qualifying for new lines of credit can be tricky depending on your credit score. You may need to improve your credit before debt consolidation can become a realistic option.

Balance Transfer Credit Cards

Balance transfer credit cards are another popular method of debt consolidation.

Unlike debt consolidation loans, balance transfer cards often offer interest-free credit for a certain period of time.

A year or more at 0% interest will save a lot of money.

That said, providers generally charge a fee of roughly 3% for each transfer.

Whether or not a transfer is worth the fee depends on a number of factors including your current interest rate and how long you expect to be paying off the balance.

5. Set a Budget for 2020

Paying off debt quickly is all about finding ways to save more money, and this starts with developing a realistic budget that helps you reduce spending.

If you aren’t used to budgeting, this is the perfect time to take a close look at your financial situation and identify ways to cut costs.

Money-related anxiety is one of the most common reasons people put off budgeting, but you’ll feel a lot better once you have a clear understanding of your financial outlook.

Figure Out Where You’re At

Start by reviewing some recent bank and credit card statements to get an idea of where your money is going each month.

Fortunately, budgeting services are relatively common, and many platforms offer basic functionalities like tracking expenses for little to no cost.

You can also pay for premium applications like YNAB if you’d rather have a greater degree of control over your finances.

Keep in mind that different options have different budgeting philosophies, so there’s no “best” way to budget.

The important thing is to find an app or other system that matches your strategies and that you find easy to use.

YNAB, for example, lets you categorize income you’ve already received based on how you intend to spend it, while other services are meant to be used in different ways.

Make Adjustments

Once you’ve identified your recent spending patterns, you can start making the necessary adjustments in order to free up cash flow to start focusing on debts.

If you spent $250 eating out in December, for example, try to bring that down to $200 or even $150 in January.

You can always adjust those targets if you find that your initial goal is too high or too low.

Without a budget, it’s tough to make consistent progress and find ways to save more money.

So remember to reevaluate your budget each month, and you’ll free up enough cash to knock out your Christmas debt in no time.

6. Avoid Future Debts

It’s good to pay off debts quickly, but it’s even better to avoid them in the first place.

These tips will help you adjust your financial habits in order to cover future holiday expenses without relying on debt or paying any interest.

Find the Right Form of Credit

First, avoid future debt by finding the right form of credit.

Credit cards are most people’s go-to, but it’s important to keep in mind that every credit card functions similarly, but that doesn’t mean that every card is created equal.

In fact, credit cards can be dramatically different in everything from interest rates to rewards.

Credit card interest is incredibly high, so just a small reduction could save you a lot of money.

On the other hand, there’s no reason to limit yourself to credit cards for holiday shopping.

Their ease of use comes at a high cost, and other forms of credit offer substantially lower rates.

A personal loan, for example, can be easier to pay off and gives you a set spending budget.

If you just need credit to cover the holiday season, you should also consider signing up for a new credit card that offers an introductory period without interest.

This perk gives you more time to pay off the principal without allowing it to accumulate interest.

Whatever form of credit you choose, the important thing is to understand that different types of credit have unique pros and cons.

Credit cards generally charge interest rates of 15-20% or more, which can make it incredibly difficult to make any progress toward paying them off.

Think carefully before using a credit card to cover major purchases when you don’t have the cash on hand.

Budget Next Christmas in Advance

Every Christmas season is different, so there’s no way to determine exactly how much you’ll need to save for 2020 Christmas expenses.

That said, you can get a relatively accurate estimate by reviewing 2019 transactions and projecting them into next year.

If you spent $600 on gifts and other costs in 2019, for example, you can avoid debt next year by putting $50 into a Christmas fund each month.

Of course, there’s nothing wrong with going over that number in a given month if you happen to have some extra cash.

As next Christmas approaches, you’ll have the money you need to cover expenses using savings rather than debt.

Additionally, you’ll go into the holiday season with a defined Christmas budget instead of simply looking at your statements after the holidays are over.

This tip is perfect for Christmas, but it also applies more broadly to budgeting for major purchases.

If you can predict expenses in advance, it’s always better to start saving money now than to go into debt when you need the money.

Alex McOmie

Alex McOmie currently serves as the Managing Editor for Money Done Right. He joined the Money Done Right editorial team in summer 2019. Learn more about Alex.

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