How to Deal With Holiday Debt

The holiday season can be filled with fun times—but you might end up overspending during the most wonderful time of the year. After the busyness of the holidays settles down, you might be left with a hefty load of holiday debt.

If you took on holiday debt, getting out of it is likely a top priority. We will explore some strategies to help you get your finances back on track after the hustle and bustle of the season.

What Is Holiday Debt?

Holiday debt is the debt you take on specifically to cover purchases for the season. For example, using your credit card to purchase gifts or taking out a personal loan to cover holiday travel would fall under the category of holiday debt.

If you find yourself in debt after the holidays, you aren’t alone. According to a recent survey from LendingTree, over one-third of Americans go into debt each year to cover holiday purchases. While the exact figure varies from year to year, LendingTree found that Americans who took on holiday debt had an average of over $1,000 in holiday debt by the end of the season.

It’s especially difficult for parents to avoid debt during the holidays. According to the LendingTree survey, 45% of parents with children younger than 18 got into holiday debt.

For many, the debt is a surprise. The LendingTree survey found that 65% of those with holiday debt weren’t planning to take it on. In addition, over half of those who took out holiday debt reported that the balance was causing stress.

How to Pay Off Holiday Debt

If you are stuck with debt after the holiday season, it’s a good idea to deal with it sooner rather than later. Below are some strategies to help you pay off your holiday debts.

Take Stock

The first step in tackling this issue is taking a comprehensive look at the debts you’ve accumulated during the holiday season. Begin by listing all your outstanding balances, including credit card bills, store credit accounts, and any other sources of holiday-related debt. This step is crucial in gaining a clear understanding of the extent of your financial obligations.

A little bit of honesty can go a long way. Don’t be afraid to lay out all of the information. As you tally up the details, make sure to include the total balance, minimum monthly payments, and interest rates.

Temporarily Cut Expenses

When confronted with holiday debt, one effective strategy to regain financial balance is by temporarily cutting expenses. Start by reviewing your current spending habits and identifying non-essential expenses that can be minimized or eliminated altogether. This might include dining out less, canceling subscription services, or finding free alternatives for entertainment.

As you look for expenses to cut out of your budget, remember that the cuts can be temporary. Look for expenditures you might not miss too much. Redirect the saved funds directly towards paying down your holiday debt. It might require some sacrifices in the short term, but the long-term financial relief will be well worth it.

Use a Repayment Strategy

Dealing with holiday debt requires a strategic approach to repayment, and two popular methods are the snowball and avalanche strategies. While either strategy can be effective, it’s important to weigh your options and stick to a single plan.

Here’s a closer look at the two options:

•     Snowball method: Focus on paying off the smallest debt first while making minimum payments on the others. Once the smallest debt is cleared, roll the amount you were paying on it into the next smallest debt. This creates a snowball effect, gaining momentum as you tackle larger debts.
•     Avalanche method: The avalanche method involves prioritizing debts based on interest rates. Begin by listing all your debts from the highest to lowest interest rates. Allocate extra funds toward repaying the debt with the highest interest rate while making minimum payments on the others. Once the highest-interest debt is paid off, shift your focus to the next highest-interest debt. This method minimizes the overall interest paid over time, potentially saving you money in the long run.

The snowball method focuses on giving you smaller wins upfront, which can give you the psychological boost you need to keep going. However, the avalanche method is mathematically more efficient, which means you could save a significant amount in interest payments.

Ultimately, the choice between the snowball and avalanche methods depends on your financial personality and preferences. The snowball method offers a quicker psychological boost, while the avalanche method may save more on interest. Whichever strategy you choose, committing to a repayment plan and staying consistent will empower you to overcome holiday debt and pave the way for improved financial health.

Consider Debt Consolidation

If you have multiple loans or a balance with a high interest rate attached, then debt consolidation is worth considering. Essentially, debt consolidation allows you to combine multiple debts into a single, more manageable loan with a potentially lower interest rate. This not only simplifies your monthly payments but can also reduce the overall amount of interest you pay over time.

To initiate the process, start by researching reputable lenders and comparing their terms and interest rates. Once you’ve identified a suitable option, apply for the consolidation loan. If approved, use the funds to pay off your holiday debts, leaving you with a single consolidated balance.

While the consolidation can simplify your finances and potentially save you interest, it’s possible that this strategy will backfire. For example, let’s say you take out a personal loan to pay off your credit card balances. If you start building up a balance on your credit cards again, then you’ll end up with even more debt than you started with. For anyone concerned about overspending after consolidating debt, consider closing your credit cards or skipping this strategy altogether.

Reset Your Spending Habits

As you deal with your holiday debt, it’s a good idea to think about how you accumulated this debt in the first place. It’s easy to simply blame the holidays as a busy time of year. But for most with credit card debt, the poor spending habits go beyond the holidays.

Take a critical look at your current spending patterns and identify areas where you can make cuts. This may involve distinguishing between wants and needs, prioritizing essential expenses, and curbing discretionary spending. By consciously adopting a more frugal mindset, you can free up funds that can be redirected toward repaying your holiday debts.

If you want to take things a step further, a no-spend challenge is a worthwhile way to reset your spending. Essentially, a no-spend challenge involves committing to no unnecessary spending for a predetermined period of time. For example, you might commit to a week or a month of no spending on discretionary purchases. Of course, you can still pay for the things you need, like rent, groceries, and gas. But avoid impulse purchases in the checkout line, new clothes,  hobby gear, and other things that you can technically live without.

It’s an opportunity to reassess your relationship with money, become more mindful of spending triggers, and redirect your focus toward your financial goals, such as debt repayment.

Throughout the no-spend challenge, find creative ways to meet your needs without spending money. This could involve cooking at home, exploring free leisure activities, or repurposing items you already own. The experience can be transformative, helping you develop healthier spending habits and providing a financial detox that contributes to helping you get out of holiday debt.

But the benefits of a no-spend challenge don’t have to stop there. You could walk away from the challenge with a new appreciation for spending on what matters to you most. You might even give up some of your bad spending habits after living without them for a month.

Try a Side Hustle

While there is a limit to how much spending you can cut out of your budget, there’s no limit to your income. A lucrative side hustle could be the solution you need to pay off your holiday debt.

Engaging in a side hustle not only boosts your income but also provides a sense of control over your financial situation. Designate the earnings from your side hustle exclusively for debt repayment to expedite the process.

Not only can a side hustle help you get out of debt right now, but it can also serve as a long-term financial strategy. When you add a new stream of income to your life, it offers a cushion for future expenses and reduces reliance on credit for purchases any time of the year.

Some side hustle ideas include freelance graphic design, dog walking, babysitting, selling printables, and more. The great thing about side hustles is that you can take on as much work or as little work as you can handle. Also, you can choose to make this a temporary thing to help you pay off holiday debt or a long-term strategy to improve your financial situation.

How to Avoid Holiday Debt Next Year

As you deal with holiday debt, the hassle of paying off this year’s festivities might make you want to avoid taking on any holiday debt next year. Avoiding holiday debt usually starts with early planning to cover the higher expenses tied to the holiday season.

Below are some strategies to help you avoid holiday debt next season.

Start Saving Early

The best way to avoid holiday debt is to start saving for the season of spending in advance.

Begin by creating a dedicated holiday savings fund at the start of the year, allocating a manageable portion of your income each month. By consistently contributing to this fund, you accumulate a financial cushion specifically earmarked for holiday expenses, reducing the need to rely on credit.

To make saving early even more effective, consider leveraging automation. Set up automatic transfers from your main account or direct deposits from your paycheck to your holiday savings fund. This ensures that you consistently contribute to your holiday fund without the need for constant manual intervention.

When the next holiday season rolls around, you’ll be ready to cover the costs with cash. Not only will this help you avoid debt, but it may also help you avoid extra stress during the holidays.

Set a Budget

I recommend setting a budget for your holiday fund, considering factors such as gifts, decorations, travel, and any other anticipated expenses. This allows you to have a clear roadmap for your savings efforts, ensuring that you are adequately prepared for the financial demands of the holiday season.

Do your best to include every expense in your budget. But just in case, add some margin for error. For example, you might tack on an extra 10%-25% to your holiday spending plans to account for things you may have forgotten about or did not expect.

Don’t Cave to Outside Expectations

The holiday season is often filled with a big dose of emotions. It’s important to recognize that the desire to meet societal or family expectations during the holidays can often lead to overspending. Take a proactive stance by establishing clear boundaries and communicating openly with friends and family about your financial limitations.

I recommend prioritizing open and honest conversations about gift exchanges. Suggest budget-friendly options such as setting spending limits or opting for creative and thoughtful homemade gifts. By communicating clear expectations, you can avoid uncomfortable situations.

Resist the urge to compete or compare your holiday celebrations with others. Social media and other external influences can create a sense of obligation to overspend, but it’s essential to prioritize your financial well-being over external expectations. Remember that the true spirit of the holidays lies in spending quality time with loved ones, not in the material value of gifts or elaborate celebrations.

Frequently Asked Questions

How Do I Recover From Holiday Spending?

Start the recovery process by taking stock of your financial situation. Then tighten your budget and redirect resources to pay off any holiday debt. After that, it’s time to start saving for the next holiday season to avoid being in the same boat next year.

Do People Go Into Debt During Christmas?

Yes. According to a recent survey, over a third of Americans went into debt over the holiday season.

How to Manage Credit Card Debt When Holiday Shopping?

If you have credit card debt, this holiday season might look a little different. Come up with a budget for your holiday spending and stick to it so you don’t make the problem worse. If you’re having trouble dealing with your credit card debt, consider debt consolidation.

The Bottom Line

Many Americans go into debt during the holiday season. Although it’s easy to fall into holiday debt, the weight of this debt burden can stick around throughout the year. Take action to eliminate your holiday debt, and once you pay it off, start saving for next year’s festivities to avoid repeating the holiday debt cycle.