While the festive season is a time to celebrate with friends and family, it can also be a time of undue financial stress. Many Australians have started the new year with a debt hangover, cutting the festive mood short. But the good news is that there are ways to manage your post-Christmas debt so that you can start 2018 with your best foot forward.
A finder.com.au study has estimated that in December 2017, Aussies spent $1,727 in purchases on their credit cards, collectively racking up $230 million in interest alone from Christmas and New Year expenses.
With this in mind, here are four ways to tackle your post-Christmas debt:
Prioritise high interest debt first
Many of us have multiple credit accounts, each accruing interest at a different rate. However, by focusing on the debt with the highest interest rate, you could greatly reduce your interest costs. Of course, you should always be making the minimum repayment on all of your accounts, but focussing on the highest interest account first when making overpayments can reduce the overall amount of interest you have to pay in the long run.
To demonstrate, if you have a credit card with an interest rate of 11% p.a. and a personal loan with an interest rate of 5% p.a., you should aim to pay off the credit card debt first to avoid paying a higher amount of interest in the long run. When you’ve successfully paid off the credit card, you can then focus on the next highest interest accruing account.
Pay off more than the minimum repayment
Making just the minimum repayment is likely to keep you in debt for longer and increase the amount of interest you’ll be paying overall. Look at your budget and realistically work out how much you can set aside each month to repay above the minimum. The MoneySmart credit card calculator can show you how much you will save by making higher repayments and also how long it will take you to pay off your debt with certain repayment amounts. Once you’re happy with your timeline, consider setting up an automatic transfer each month to help you stay on track of your repayments.
Debt consolidation can help you manage the timeline of your debt repayments. By opting to consolidate your debt, you’ll have greater flexibility in how you approach your repayments.
Consider a balance transfer. This allows you to consolidate one or more existing credit card debts into a new credit card that has a lower or 0% interest rate. During this grace period your balance is no longer accruing interest, giving you the opportunity to tackle it quickly. The interest-free period will differ between cards, so aim to the pay off the entirety of your debt before the promotional period ends. Longer promotional periods are often between 12 and 24 months, giving you more time to handle your debt.
Be aware that you may need to pay a balance transfer fee (usually 2-3% of your total debt) and that some restrictions may apply based on the card issuer. Be aware of which issuers you won’t be able to transfer your balance to.
Contact a financial counsellor
If your Christmas spending really got out of hand and you’re struggling to pay off your debt, it may be time to consider a financial counsellor. A financial counsellor can provide free, confidential services and provide suggestions on how to improve your current financial situation. The National Debt Helpline offers over-the-phone counselling services and also strategies on how to manage debt.
The festive season might be a time for celebration, but starting the new year with a debt hangover is no fun for anyone. Consider these debt management tips to reduce your financial stress. And in the coming year ahead, why not set aside a little each month for a “Christmas Fund” so that you can avoid the seasonal debt in the future?