Dealing with Christmas Debt - Key Tips From Financial Adviser Hannah McQueen

December 17, 2020

December to February can be one of the trickiest times of year for your finances – there’s the cost of Christmas, the cost of a summer holiday, and then back-to-school costs quickly follow.

If you’ve blown the budget over this period it can put all your goals for the year ahead seriously on the backfoot once the bills start rolling in – so here are some tips to get rid of your debt and back on track as fast as possible.  

What’s the fastest way to get rid of credit card debt?

The issue with credit card debt is that it’s high interest, which means if you don’t pay it off fast, you’ll end up paying much more for that ‘bargain’ you snagged in the first place. That means the first priority is to reduce the interest bill, so you can direct more of your cash to paying off the actual debt. You could do that by doing a zero-interest transfer for a set period (e.g. 6 months) or it could be a fixed-term low rate (e.g. 1.99% for two years) or a slightly higher rate again (e.g. 6%) that would apply until the balance you transferred is repaid. The best option for you depends on how fast you can get the debt repaid – so you need to do some maths to see how much you can dedicate towards reducing the debt each month. The main fishhook here is the offers tend to only be available to new customers, you’ll have to switch providers to be eligible. What the balance transfer doesn’t address is the issues and spending behaviours that created the debt in the first place. So, at a minimum I’d suggest lowering your credit card limit as you reduce your debt –or better yet, cutting the card up so you can’t add to the balance, as that will incur the ordinary interest rate and put your progress back further. Seeing progress is really important as that will encourage you to keep attacking it, whereas going backwards can make you feel defeated.

How should you prioritise what to pay off first?

The general rule of thumb is to pay off the debt with the highest interest rate first, as that debt will grow the fastest if you do nothing.  If you can get it all onto a low interest rate then that should free up your surplus to channel more into the debt repayment.  But paying of debt is as much as a mental game as it is financial.  Sometimes, if you have little debts, even if the interest rate is lower than some other debts, paying them off quickly to remove them from your list of debts is a way of getting a quick win, which helps build the momentum of progress.  The other option, again playing more to your psychology of money, is to pay down the debt that has the largest monthly repayment attached to it. Sometimes this is the largest debt, but often it isn’t.  In clearing this debt first, it has a disproportionate impact of your surplus and the momentum you can then build –so you have a sense of nailing things quickly – which helps you remain engaged with the process.  

Is it worth getting a debt consolidation loan?

Potentially- I’d want to know that the consolidation loan offered the best interest rate you could get, that there weren’t exorbitant fees for repaying that loan early, that you weren’t going to end up paying more in interest because the loan simply stretched your repayments out over a much longer time period, or conversely that it didn't squeeze your cash flow too much by requiring much higher repayments. With mortgage interest rates so low it may also be worth considering whether you could get a top up on your mortgage. That definitely stretches the debt over a much longer period, but in some cases it’s important to reduce your immediate outgoings until we can get you back on an even keel - and then you’d need to work on a financial strategy to keep you out of debt and ultimately, get you mortgage-free faster.  

Getting yourself out of debt isn’t an easy task, and it can be a mental challenge as much as anything – but getting it sorted is essential so we can then focus on supercharging your future potential!  

Hannah McQueen is an Authorised Financial Adviser, Chartered Accountant Fellow, Author and founder of enable.me - financial strategy & coaching.

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