Don’t go into next Christmas with unpaid bills from 2021
Ho, ho, hold on a minute – did we all really spend that much over the holidays?
Probably, yes. In the lead-up to the recent holiday season, Canadians were ready to spend more than ever on gifts: $1,841 on average, says a report from Deloitte. Purchases were motivated in part by the desire to brighten what was a pretty dark year. About 2/3 of shoppers planned to make good use of their credit cards to do it.
Now, after all that holiday cheer, comes the reality check. We asked JR Shaw School of Business instructor and certified financial planner Tannya McBride (Bachelor of Applied Finance ’07) about dealing with the lump of coal that is holiday debt, and how to handle the job of refilling Santa’s sleigh next December.
Tackle the worst bill first, and fast
“I recommend to start by paying whatever [debt has] the highest interest rate,” says McBride. “And pay as much as you can.”
She makes her case with calculations. Say there's $1,500 is sitting on a credit card with 19% interest and that you pay only the minimum $25 per month.
“That would take you 191 months to pay back. That’s 16 years. And in that time, the interest that you’re paying is $3,267."
“That would take you 191 months to pay back. That’s 16 years."
The reason for the ballooning balance is twofold. First, of that $25, only $0.25 goes toward the principle; the rest services interest. Second, interest compounds. That 19% is applied not just to the original debt but to the interest accrued each month as well.
Boost your payments to $50 and the pay period drops to 42 months – or just three more Christmases. Try for a year at $138 per month instead, McBride advises, which will keep the interest to a total of $159.
Consolidate your debt
If what you owe is spread across several credit cards, consider rolling them into a single debt.
One way is a consolidation loan, says McBride. A financial institution will pay off your cards and restructure the debt with fixed monthly payments at a lower rate of interest. “You know exactly how many months it will take you to pay it down,” says McBride.
Just know that your credit cards will be cancelled as a result.
If you don’t have a line of credit with a lower interest rate, another option is a new credit card, says McBride. Some offer low introductory rates, perhaps even 0%, for three to six months.
“That can save you quite a bit of money in interest. Keep repaying as much as you can.”
Involve the family
Dealing with debt can offer teachable moments, says McBride. Just as the holiday season brought the family together, so can coming to terms with its aftermath.
“It’s financially literacy. Even involve your kids. It’s a matter of having open communication. Conversations are important.”
"It’s a matter of having open communication."
As you come to terms with what you spent, review the impact with your family, and work together on creating a payment plan.
After that, McBride recommends asking tough questions: How much did we really need? What can we do without for next year? Let that be the basis of your budget and start saving accordingly.
Then, next year, after making your list and checking it twice, leave the credit cards at home.
“Using cash is always best,” says McBride. “But to do that you must have planned for it.”
Crunch the numbers
Not sure about how much you’ll end up paying in the long run? McBride recommends using an online calculator to illustrate your options.
Just input your balance, interest rate, and timeframe or expected monthly payment and the program will point the way to being debt free by next Christmas.