Question: You splurged on presents and treats for the family over the holidays and now the bills are coming in. What do you do?
a) Hide them in a drawer.
b) Cut your credit cards into snowflake-shapes using your children’s craft scissors.
c) Go shopping!
Answer: None of the above, of course.
But the truth is, this month will find many parents wondering how to pay off the debts they accrued enjoying the holiday season. And with the economy progressively worsening, the traditional post-holiday spending hangover is likely to seem a little more painful this year.
Sarah Fouquart, a New York-based group manager with GreenPath Debt Counseling, advises clients not to panic. “We start to see people struggling with post-holiday debt towards the end of January,” she says. “These are bills that they've ignored over the holiday period. We encourage them to look at the overall picture and take a longer-term view.”
Fouquart says the first step is to work out a household budget. Add up all your monthly expenses, including everything from utility bills and grocery expenses to grabbed coffee on the way to work. Subtract the total from your monthly income. If there’s money left over, this is the amount you should add to your credit card payments. If not, use this opportunity to think hard about where you can save — brew your coffee at home, for instance — until your debt is resolved. Adjust the budget according to these cuts. Then stash your credit cards somewhere you won’t be tempted to use them for awhile — in the freezer, in the bathroom cabinet behind child safety locks, wherever.
Now start your payback action plan, remembering the following dos and don’ts.
• Pay as much as you can and make the biggest payments on the debts with the highest interest.
• Think about any extra cash you might have coming, such as income tax returns, and earmark it for paying off debt.
• Consider transferring your credit card balances to a lower-interest card. Make sure you read the fine print on the new card, though, so that the switch really will bring savings. Pay attention to how long the new rate will apply, what transfer fees will apply, and what standard interest rate will apply later.
• Revolving credit card debt into a home equity loan or line of credit is a step you should avoid.
• Don’t take cash advances or payday loans.
• Don’t borrow more money to pay off a credit card bill.
When paying credit card bills, it’s important to pay more than the minimum due; otherwise you’ll never chip away at the total. However, if the minimum is all you can afford, Fouquart suggests the following approach: For the first payment, pay the minimum. The following month, the minimum will be lower, but stick to the first amount. Continue paying that amount until the debt is gone.
If all this sounds overwhelming, maybe you need the help of a credit counselor. A good credit counselor will work with you for free or low cost to set your household budget and develop a personalized plan to prevent future difficulties. If your debts are severe, a counselor can enroll you in a Debt Management Plan (DMP), where you pay them a fixed sum each month and they distribute these funds to your creditors, perhaps negotiating reduced or waived finance charges on your debt, and relieving you of the anxiety of collection calls and multiple bills.
However, beware of credit counseling services that jump straight to the DMP option. Gail Cunningham of The National Foundation for Credit Counseling (NFCC) warns, “Just as you’d do your homework when selecting a new doctor or accountant, you need to research this area.”
Even “nonprofit” credit counseling firms may charge hidden fees. “There are many red flags,” says Cunningham, “but prominent would be promoting a DMP as the only solution, or the absence of any substantive financial education.” The NFCC’s member agencies offer dozens of financial education workshops that are open to the public and free of charge.
Finally, if you’re taking steps to address your debt, you’re off to a positive start in 2009. According to recent figures from the Federal Reserve, Americans are already responding to the financial crisis by using their credit cards less. This year, why not aim to use cash only and give yourself the gift of a debt-free Christmas?
Better still, plan for a 2009 holiday season full of simple — and economical — fun. Make or bake your presents. Spend time with the kids building train tracks, painting pictures, or tobogganing. And teach them that the holidays don’t have to be a big consumer binge to be happy.
• A good place to start if you’re seeking credit counseling is the NFCC’s website. Go to www.DebtAdvice.org and hit “Take the First Step,” or call the NFCC at (800) 388 2227.
• For extra advice on handling credit card debt, check out “51 Ways to Save Hundreds on Loans and Credit Cards” at www.fdic.gov/consumers.
KIRSTEN DENKER is a freelance writer living as economically as possible in Brooklyn with her husband and two children, Benjamin and Caroline.