Now that the festive season is behind you, what remains with you are the beautiful memories and of course, the huge holiday debt that you accumulated.
As the new year kicks off, two factors can greatly impact your credit; how you pay (or not pay) your debt and how much of your available credit you are using. That said, late or missed payments on your credit cards can hurt your credit and so does using most of your available credit.
To help you stay on the right track, here are tips for paying off holiday debt before it hurts your credit.
1. Cut Back on Your Expenses
One of the smartest moves in paying off debt is to avoid adding more debt. By slashing your expenses, you put your spending under control and reduce your reliance on credit. Also, you might free up some money which can go towards debt repayment.
Cutting back on expenses can take various forms depending on your spending habits. It may entail:
- Creating a budget and sticking to it
- Using cash instead of credit cards to pay for products or services
- Cooking your own meals instead of eating out
- Using public transport instead of driving
- Re-evaluating and canceling subscriptions that you can do without
- Decreasing your usage of utilities such as power and water
- Shop around for better deals and lower prices on shopping
2. Start Paying off Your Credit Card Debt
Your credit card debt is likely to hurt your credit more than any other debt. The reason being, credit cards not only carry high-interest rates but their utilization accounts for 30% of your FICO credit scores.
Credit utilization ratio (CUR) is the percentage of the credit that you are utilizing out of the total credit available.
For example, if the total available credit on all your credit cards is $8,000 and your available balance is $4,000, then your credit utilization ratio is 50% ($4,000/$8,000 X 100).
Higher credit utilization creates the impression of poor debt management. Prioritizing your credit card payments lowers your utilization rate, consequently improving your credit score and saving you money on interest payments.
Tip: Always aim to keep your CUR below 30%, and when looking to build credit, a ratio of 10% and below would be ideal.
3. Take a Personal Loan
A personal loan is a loan that you take to use at your discretion and usually. It comes with a lower interest rate: While credit card rates can average at 14-15%, you can get a personal loan with interest as low as 6%.
You will, however, need a good credit score (690 and above) and stable income to negotiate a good deal. That said, lower scores will attract more interest but you can still land better rates than with credit cards.
As such, if diligently, such as offsetting your credit card debt, you can use the loan to save your credit in the long run. Also, personal loan lenders are increasing by the day, opening more avenues to shop around.
4. Get a Balance Transfer Card
If you are faced with several credit cards with high interest, a balance transfer card can help you save on interest and pay your debt faster.
Typically, a balance transfer credit card charges zero or low interest for a promotional period of 12-18 months. This gives you an opportunity to pay off only the principal of your debt or if any interest, at a lower rate.
On the other hand, this type of credit card may also temporarily hurt your credit in two ways:
- Moving your credit to the new card may increase your credit utilization ratio
- Opening a new credit card account may result in a hard inquiry which may bring your score a few points lower
- A new account will affect the average length of your credit history
Nevertheless, the effects of the above factors on your credit are less severe compared to the effects of not eliminating your credit card debt in the long run.
Better yet, you can still do a balance transfer without hurting your credit using the tips below:
- Ensure that you can clear the debt without fail and within the promotional period
- Make sure that the balance you transfer does not max out your transfer card or cause a higher credit utilization ratio
- Avoid adding more debt to both the original card and the balance transfer card until you have cleared your debt
- Inquire if there is a balance transfer fee and assess its financial impact beforehand
The Bottom Line
It is possible to repay your holiday debt before it hurts your credit. This, however, calls for drastic measures such as change of spending habits, consistency, discipline, and sacrifice. While at it, you might want to start saving up for the next holiday to avoid finding yourself in the same situation come next year.
For further financial advice, credit repair, and consultation, contact Credit Absolute.