Get Ahead of Your Vacation Debts with a Repayment Plan | Personal finance

Sean Pyles, Nerd Wallet

During a holiday season that many of us will spend apart from loved ones, gift giving may seem even more important than usual. After all, if you can’t travel to see your family, you can at least see them unwrapping presents on a video call, right?

And just as many families will use a video service for the holidays this year, many will also turn to credit cards to cover their expressions of love. Three-quarters of holiday shoppers plan to use credit cards to buy gifts this year, according to a NerdWallet survey of 2,049 American adults conducted online by The Harris Poll.

Using credit cards can be a great way to earn rewards or get cash back, but make sure you know how to pay off the debt you incur. Otherwise, you could still pay off the debt at the end of next year, which 33% of 2019 vacation shoppers who used credit cards said they still did in a survey in September.

Here’s how to handle vacation debt.

Take stock of what you owe and what you can pay

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First, catalog your vacation debt. Log into each credit account and note the balance and interest rate. Consider creating a simple spreadsheet or using a debt monitoring to keep accounts organized. If you have debt that isn’t on a credit card, such as a business loan from a company like Klarna, list that as well.

With your debts sorted, turn to your budget. the Budget 50/30/20 is an easy pattern. With this approach, half of take-home pay is spent on basic necessities, such as housing and groceries. Then 30% is spent on cravings, like takeout or a good bottle of champagne to celebrate farewell to 2020 on New Year’s Eve. Finally, 20% of your income is spent on debt and savings .

As you build your budget, figure out how much money you can spend on debt each month. Divide the total debt by this amount to estimate how quickly you can get rid of debt, keeping in mind that accrued interest can increase balances.

Focusing on what you can afford monthly helps make your debt more manageable, says Kathleen Burns Kingsbury, a Vermont-based wealth psychology expert who helps people understand the personal drivers of financial decisions.

“Ask for what you can reasonably afford each week or month and really work towards it,” says Burns Kingsbury. “From a psychological perspective, it helps you feel a sense of accomplishment, and the more successful you feel, the more motivated you are to continue that behavior.”

Find your payment path

Your best way to resolve holiday debt depends on your cash flow, credit score, and personal preferences. Here are a few:

Pay off the entire balance with the first statement

If you have cash, this is the fastest way to settle your debts – and the cheapest, because you avoid paying interest. According to the NerdWallet shopping survey, 35% of vacation shoppers who added credit card debt in 2019 took this approach.

Roll a snowball or trigger an avalanche

The “debt snowball” and “debt avalanche” are two popular methods of debt repayment. What’s right for you depends on your financial priorities.

With the debt snowball method, you focus on paying off the smaller balance first, then apply the amount you were paying on that first debt to the next. The amount you pay on the targeted debt keeps growing, like a snowball rolling down the slope. You can choose this option if you need the first earnings from paying the first accounts to stay motivated.

The debt avalanche method may be best if you want to pay as little interest as possible. With this route, you prioritize paying off the debt with the highest interest rate first, regardless of the size of the balance. Again, when that first debt is incurred, you put the amount you pay on it into the next highest interest account, repeating until you are out of debt.

Consider a balance transfer card

To avoid costly credit card interest, consider getting a balance transfer credit card with a promotional period of 0% APR, says Mike Cocco, a Nutley, New Jersey-based Equitable financial advisor.

“Once you have that, you eliminate interest, which can get you out of debt much faster,” Cocco says. “Then be aware of the end of the 0% APR period and work backwards to create a reverse Christmas club to pay off your debt. If you have $1,000 on the card and 12 months interest-free, you need to pay at least $83 per month. »

To get a 0% balance transfer offer, you’ll need good to excellent credit. Generally this means a score of 690 or higher, although credit scores alone do not guarantee approval. Issuers will look at your income, existing debts, and other information.

Whichever method of debt repayment you choose, the important thing is to find a plan and commit to it. Taking decisive action to settle your debt can ensure that you are debt free faster – and maybe get you started racking up savings for the 2021 holiday season.

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