Your guests have barely left the house and the tree won’t be taken down for another week, but you may already be dreading that first post-holiday credit card bill. If this sounds like you, you’re not alone. As we noted recently, many of us are all too willing to spend money on our loved ones, but of course pulling out the credit card is much easier than making the payments.
As you reluctantly tear open those envelopes, remember that some tactics are better than others when it comes to paying down debt. Here are some of the pitfalls you should avoid when determining how to get out of the holiday red:
Balance transfers: New credit card offers may show up with your credit card bills, tempting you to transfer the balance on your current cards to one with an introductory zero percent interest rate. While this may be a good idea for some, it takes careful planning and discipline to do it right. That means resisting the urge to use the card for new purchases. Also be aware that most cards charge a fee of 3 to 5 percent of the transfer amount, which could eliminate your zero percent APR advantage.
Retirement savings: Dipping into your 401(k) is a dangerous game, primarily because you’re borrowing from your future self — usually with no realistic plan to make up those funds later. You also will be paying back those funds with after-tax money, only to be taxed again when you take it out to retire. As if that weren’t enough disincentive, if you leave your job unexpectedly, you’ll have very little time to pay back the lump sum.
Payday loans: With these short-term, unsecured loans, the house always wins. They’re touted as an advance on your paycheck, but the drawbacks are significant. The interest rates and fees are high, leaving you with less of your paycheck than you’d have by simply making a lower payment on your credit card or waiting until you get paid before sending off the Visa check.
Borrowing from friends or family: Yes, in some cases it’s possible to ask a loved one to spot you enough cash to cover your next big credit card payment. But do you really want to go to the people whose gifts helped put you in debt? Instead, make it your goal for the coming year to save for holiday spending in small increments so that when it comes time again to buy your loved ones gifts, you have a set amount to spend and can avoid going back into debt.
Not having a plan: If you’re serious about getting out of debt, it’s not enough to make only the minimum payments — especially if you’re paying off more than one card at a time. Focus on aggressively paying down one of those cards, either the one with the highest interest rate or, to keep you motivated, the one with the smallest balance. You should also take a high-level approach. If your debt is so crippling that you’re unsure where to start, consulting a bankruptcy attorney may be in your best interest.