With Black Friday behind us, many consumers are sure to be waking up with a spending hangover. According to ShopperTrak, a data analytics company, American consumers are estimated to have spent $12.1 billion on November 26 and 27 of this year. Many of these purchases were, undoubtedly, financed using credit cards. Last year, the Federal Reserve reported that the total outstanding revolving credit for the month of December was $887.9B -- the highest it has been in years, and given the rising trajectory, it is possible that this December may be higher as well. If you're one of the many consumers who needs help dealing with holiday credit card debt, here are some tips to help you recover faster.
- Try to pay more than the minimum amount due. It's easy to think that a credit card's minimum payment is also the "suggested amount due". In truth, however, paying just the minimum can lead to years of debt and hundreds (if not thousands) in interest charges. The way banks decide what your minimum amount due will be varies -- one of the most common methods is using 1 percent of your total outstanding balance plus the interest. A common misconception is that the 'minimum amount due' is designed to get you to pay off your balance in some short amount of time -- this is far from true, as we'll explain below.
Following that common payment described above, let's see how paying down just2,000 would play out. Assuming the average credit card APR of 15 percent, it would take you 10.3 years to pay off that bill with just minimum payments -- and that's assuming you don't make any new purchases onto the card. Over that time, you would also have paid $1,593 in interest, close to doubling your original debt amount. By contrast, if you change to a fixed payment plan of200 per month instead, you will pay off that same balance in just 7 months, after paying39 in interest -- quite the difference.
- Consolidate Your Debt. If you bit off more than you can chew -- or spent more than you could afford -- you don't necessarily have to be stuck paying interest. Using a balance transfer credit card can be an effective way of deferring interest payments for up to 21 months. Our research suggests that a typical American consumer can end up saving as much as $1,561 in interest by using balance transfer credit cards. Look for '0 percent APR on balance transfers' promotional offers. While you're at it, familiarize yourself with the terms of the new card's agreement, to make sure you know what you're getting yourself into.
Keep in mind that balance transfer credit cards typically come with a 3 percent transfer fee. This will affect your minimum payments -- so be sure you can afford to make at least whatever the new minimum amount due will be, before transferring. It's better to pay interest than to get slapped with a late fee or have your bank report missed payments to a credit-reporting agency. Make sure you plan accordingly.
- Reflect on your shopping habits, for a long-term fix. All the advice given above is all well and good, but the only long-term solution to dealing with credit card debt will come through changing spending habits. If you accumulated a ton of credit card debt on Black Friday, consider how you made your purchases. For example, it's ill advised to simply go out shopping for bargains and good deals. 30 percent off deals are still 70 percent on. Only seek out specific items that you know you need. For example, if you have broken computer speakers that you need to replace, search for that item and that item alone. Otherwise, you may end up buying things only because they appear as a bargain to you, and are "too good to pass up". This is one of the biggest traps individuals fall into, and it's what gets them into credit card trouble every holiday shopping season.