10 Tips to Help You Recover from Holiday Debt
Your credit report acts as your financial references when you apply for new credit. Whether you’re trying to build credit for the first time or want to re-build your credit standing, the only way to build a strong credit history is to use credit wisely. Following are 10 tried and true tips to Live Credit Smart:
1. Assess your overall financial situation.
Before you do anything else, it is important to examine your entire financial situation, including your monthly budget and your short and long-term financial goals. Make a list of all of your debts, payment due dates, minimum payment amounts, interest rates and the timeframe in which you would like to pay down your debt. Don’t forget to consider the other financial goals you may wish to accomplish.
2. Select a payment strategy that works for you.
Consider paying down the credit cards with the highest interest rates first. If that seems too daunting, try paying down your smallest balance first so you can see your progress toward eliminating your bills right away. Pay more than the minimum payments, if you can, but most importantly – always pay on time. If you need additional help managing your debt, you might consider reaching out to an accredited credit counselor such as a member of The National Foundation for Credit Counseling (http://www.nfcc.org/).
3. Stop spending frivolously.
While it may sound simple, an important step is to curtail unnecessary spending. Put yourself on a financial diet and try not to spend money on non-essential items until you catch up on any extra debt you incurred during the holidays. Using coupons and comparison shopping for essential items and cutting extra expenses, can really make a big a difference in your monthly budget. In fact, simple lifestyle changes can help you save thousands of dollars over the course of year.
Here are a few ideas of how you can start saving:
Cut back on your daily expenses by carpooling to work, making coffee at home, bringing your lunch to work, switching to reusable water bottles and doing your own nails instead of going to the salon. Together those changes could total more than $5000 in savings per year.
Review your monthly reoccurring expenditures like cable and mobile phone bills to make sure you have the plan that is giving you the most bang for your buck. Determine whether you really need unlimited text messages or if you’re really watching all the channels you’re paying for and modify your plans accordingly.
Take advantage of free leisure activities - Instead of spending money on a movie ticket or going out to dinner, invite your friends for an afternoon hike, take the kids to the park or visit a free museum or art exhibit. Try organizing a pot luck dinner in your neighborhood or take a free class at a local community center. Consider taking advantage of free concerts or outdoor movies in the summer.
Getting involved with a local charity and spending some of your free time volunteering is a great low cost activity with countless rewards.
The money you can save by cutting back on items like these can go toward paying down your debt or saving for next year.
4. Use tax returns and holiday bonuses wisely.
Holiday bonuses and tax returns are two larger lump sums of money that can be used to make a dent in debt, if used wisely. Make sure you are taking full advantage of extra income by putting it toward credit card debt or using it to save for next year’s holiday expenses. Don’t look at these things as free money to spend – rather, use them to pay down debt and boost your credit score to help meet your goals.
5. Start proactively saving for next year’s holiday shopping.
It’s never too early to start saving for next year. Make a holiday shopping budget and set aside money specifically dedicated to it. If you put away $50 each month, before you know it, you’ll have $500 to put toward holiday gifts and travel. The more you can pay in cash, the less you’ll have to worry about paying back this time next year.
6. Know what you want to buy and the best time to buy it.
Write down all of the people you need to buy for and start listing ideas for potential gifts. Have an idea of what you want to buy well in advance of the holidays and keep an eye out for those gifts over the course of the year. Carefully review your favorite stores’ weekly ads or use a service such as pricegrabber.com, which allows you to compare prices on thousands of items including electronics, furniture, books, movies, and even groceries to help you get the best prices.
Take the time to research the best times to buy big ticket items. For instance, bicycles and sports gear often go on sale in January and February while big home appliances can usually be found at discounted rates during September and October. Knowing what you want to buy will give you plenty of time to take advantage of sales and avoid marked up prices as the holidays near.
7. Start shopping early.
By shopping early, you will absorb the cost of holiday gifts throughout the year rather than all at once. Your bills will be easier to pay off and you will keep your credit card balances low, yet they will remain active throughout the year - all of which are good ways to strengthen your credit score.
8. Don’t buy big ticket items without a plan to pay them off.
Even if that big screen TV you’ve always wanted is finally on sale, don’t take it home without knowing whether or not it fits into your budget or without having a plan to pay it off. Determine how you can make adjustments and sacrifices in other parts of your budget to help pay for it. Make sure you know how long it will take to pay it off and what funds you will use to pay for any large expenses.
9. Evaluate your credit cards portfolio.
Make sure you’re being wise about what credit cards you’re using and why. Consider eliminating credit cards with annual fees and incorporating more rewards cards into your wallet. Take advantage of the points you can accumulate with a rewards card and put them towards some of your holiday purchases.
10. Check your credit score so you have a benchmark for improvement.
Check your credit report and purchase a credit score so you understand the baseline of where you stand and how your credit may have been impacted by your holiday spending. During times of high activity on your credit accounts, it is also especially important to make sure that your credit report is accurate. Then, after you have had time to achieve your goals and pay down your debt, get another score to see how where you fall in the range of risk has changed once you have paid down your debt.