The holidays may be the most joyous time of the year and the most dangerous. The temptation and societal pressure to overspend, whether splurging on a new outfit, spoiling a spouse or a grandchild, or filling your shopping cart with shiny, sparkly objects to bedazzle your holiday guests, is almost impossible to resist.
If you increase your debt at this time of year, you will hardly be alone. Indeed, many Americans feel justified in doing so. In a creditcards.com poll, more than half of credit card debtors (57%) said they think the holidays are a valid reason to add to their debt.1
Add this prevailing attitude to the fact U.S. consumers are bombarded with 5,000 ad messages a day, it’s easy to understand how many U.S. consumers could easily lose control of their finances.2
Against this capitalist tide, however, consumers’ behaviors are reflecting at least some measure of the current economic reality. The National Retail Federation (NRF) reported that U.S. consumers plan to spend $997.79 on gifts, holiday items like food and decorations, and additional “non-gift” purchases for themselves and their families, in 2020.3 That’s less than the average $1,048 consumers had planned to spend in 2019.4
Taking on debt can oftentimes be unavoidable and sometimes even advisable. In other words, there can be good debt and bad debt. If on your only trip to Paris you hadn’t accounted for the 25 euros (about $29) it costs to travel to the top of the Eiffel Tower, would you deny yourself this once-in-a-lifetime experience because it wasn’t in your budget?5 That would be foolish. Similarly, taking on a home mortgage to buy a home, raise a family, and build equity would seem like a smart use of debt. As a result, older Americans now have nearly $8 trillion in home equity wealth, money they may be able to count on for their retirement.
These examples notwithstanding, it’s still important to realize how revolving credit card debt works. As an example, let’s use the roughly $1,000 the average consumer plans to spend during the holidays in 2020. If the consumer plans to finance the debt by making minimal monthly payments of 2% of the total at an interest rate of 15%, a rate reserved for those with good credit, it will take 79 months to pay off.6
Unfortunately, many Americans are looking at more than just $1,000 in debt. Rather, the average U.S. consumer said they would need $58,673 to be totally free of all their cumulative debts, according to a 2019 CNBC story entitled, “What Americans really want for the holidays is to pay down debt.”7
Strategies and Solutions for Better Managing Debt
Living with revolving debt, student loans, and other high-interest debt doesn’t have to be a way of life. There are strategies and solutions for improving your high-interest debt situation. But this improvement will require planning, commitment, and the right financial tools. Here are some options.
Get creative with your gifts
In a pandemic year, this may not be the best time to go all out on holiday gift-giving and increase your revolving debt. Set expectations upfront. Establish spending limits or suggest that everybody on your gift list try their hand at making a homemade gift. Or just limit gifts to a select few, like your kids or grandkids. What about opening a modest savings or investment account for them, accompanied by a book on the principles of investing? As the account grows over time, appreciation of this thoughtful gift will grow.
Transfer your credit card debt onto a lower-interest or no-interest card
Transferring a high-balance credit card to a lower- or no-interest card requires discipline because once the usual promotion period of six to 12 months ends, interest begins accruing again, and depending on the card, may even accrue retroactively. Such a strategy could save you hundreds of dollars. If you don’t pay off the balance, you could be right back where you were or in worse shape financially.
Obtain an unsecured personal loan
The average interest rate on an unsecured personal loan is 9.41%, according to Experian data from Q2 2019.8 Unsecured personal loans typically have higher interest rates than secured loans — the difference to be explained in a moment — but if you find the rate to be lower than your other higher-interest debt, this could be a smart financial option.
Obtain a secured loan
A secured loan is secured by collateral, unlike a personal unsecured loan. Collateral could be savings tucked away in a savings account or a certificate of deposit, or other assets like a car or real estate you own. Secured loans typically offer better interest rates than unsecured loans because you and your lender are sharing the financial risk if you fail to pay back the loan.
Obtain a cash-out refinance
A cash-out refinance is a secured loan that replaces your current mortgage with a new larger one, which will likely include a new interest rate and new terms (length of mortgage). The new mortgage will allow you to pull out cash to pay off higher-interest debt, fund home improvements, or pay for other projects on your list.
Obtain a home equity line of credit
A home equity line of credit or HELOC is a secured loan as well, but instead of obtaining a completely new mortgage as with a cash-out, a HELOC is a second mortgage based on and secured by the equity in your home. You can use a HELOC like a credit card, but it usually comes with a much lower rate because it is secured by your home.
Obtain a reverse mortgage
A reverse mortgage loan is another form of a secured loan. It’s unique because only those 62 or older can apply for one. Unlike other kinds of secured real estate loans that must be paid back monthly, a reverse mortgage does not normally require repayment until the borrow leaves the home. Because a reverse mortgage first pays off the borrower’s current mortgage, if one exists, the borrower has no monthly mortgage payments to make, which should immediately improve cash flow. The borrower, however, must continue maintaining the home and paying property taxes and homeowners insurance, just like any other kind of mortgage.
Furthermore, if funds remain after the existing mortgage is paid off, the reverse mortgage will disburse this money via a payment plan of the borrower’s choice. One payment option is a line of credit. This is a popular choice because borrowers are charged interest only on the portion of the line they use. Meanwhile, the unused credit portion continues to grow, which can give the borrower a sturdy safety net to pay for unplanned expenses down the road. For example, if you wanted to fly across the country and surprise your kids to celebrate the holidays, even though the trip wasn’t in the budget, your reverse mortgage line of credit would be there to back you up.
Just as your calorie consumption can soar over the holidays, so can the cost of your holiday purchases. But don’t beat yourself up if you blow your diet or your debt ceiling. Life happens. There are ways to get back on course. Less important than analyzing why you got into holiday debt is having a solid plan for when you do!
We hope this article has given you some help with things to think about. Of course, every situation is different. This information is intended to be general and educational in nature and should not be construed as financial advice.