Saturday, February 10, 2007

How to wipe out holiday debt.

Kiplingers has a great article titled Wipe Out Holiday Debt. Here is what they said along with my comments.

Don't be lured into using a home-equity loan or line of credit to consolidate your bills. Consider these options instead. The holidays are past, and the credit-card bills have arrived. It's time to face the music, and it isn't necessarily jolly. Households with at least one credit card spent, on average, $1,534 this past Christmas, according to If you don't happen to have enough cash on hand to pay the entire balance, the Ghost of Christmas Past could haunt you for months or even years to come. For example, if you make just the minimum monthly payment -- $38 to start on a card with an interest rate of 16% -- you'll be paying off your balance until 2020, when you will have handed over $1,471 in total interest. First of all never make just the monthly payment, if you spend $1500 at Christmas and are only going to pay the minimum payment you spent way to much at Christmas. To get a quick view on how long it might take you to payoff your holiday debts start check out this article on financial calculators. You need to have a plan on how to pay off your credit card debt. Second, you need to establish a budget each year for your Holiday spending. I also recommend the you establish a special savings or Christmas club savings account now to help save for 2007 Christmas bills.

Consolidating bills via a home-equity loan or line of credit isn't a silver bullet.
Even if you lower the interest rate, you'll be tempted to simply stretch out the payments. And borrowing against your home has risks you may not anticipate. The best solution is to bite the bullet and pay down the extra debt quickly. You may be able to lower your interest rate simply by calling your credit card issuer, or by transferring the balance to another card. Think twice about home-equity borrowing. Transferring your credit-card balances to a less-expensive home-equity line of credit or loan is an option most financial planners discourage. "I hear all these ads touting how home-equity borrowing will let you 'eliminate debt,'" says Glenda Moelenpah, a financial planner in San Diego. "But they really just let you change it and take on greater risk, too, because you use your home as collateral." Translation: If you can't make the payments, you could lose your home in foreclosure. There is a saying that is in the personal finance world that says never use credit for something that looses value. For example, do you want to pay interest charges on all the dinners you ate out last year? Do you really want to still be paying on the dress that your daughter wore to the dance once? Transfering your bills to a home equity loan only stretches out the problem. Additionally, a lot of people will continue to use this year over year as a place to sweep up all they recent debts into and the problem will continue to grow.

Moelenpah says sales pitches often emphasize the tax deductibility of the interest that you pay. But she points out that the law lets you deduct only the interest on "acquisition indebtedness" -- what you paid for the house -- plus $100,000 of other home-equity borrowing. When you sell, you'll have to pay off any outstanding home-equity debt at closing. If you've borrowed more than the value of the home or if its market value has fallen, you could find yourself "upside down" -- owing the bank money at closing. That's not a happy place to be. Because of those risks, Moelenpah says she's reluctant to advise clients to consolidate debt with home-equity borrowing unless they take steps to avoid having the same problem again next year. My opinion is you need a place to live. I don't want to have to worry about being upside down on my mortgage or thinking about where I am going to live it I had to be foreclosed on. The problem with consolidating the loans and places you home equity on the line is, when you do get in trouble on the home equity side you will never ever remember where the debt came from. Was it the vacation to Florida, Christmas presents, the new flat screen TV, or just enjoying yourself.

If you do go that route, a home-equity loan imposes more discipline than an home-equity line of credit. With a home-equity loan, you get a lump sum and pay closing costs. The loan will require a fully amortized payment of principal and interest every month -- typically over five or ten years. Plus, rates are running a half point lower, on average (currently 8.21%), than on home-equity lines of credit, according to

How to pay it down fast
Rather than take on the risks of borrowing against your home to consolidate your credit card bills, consider these tips for disposing of debt from Money Management International, a nonprofit credit-counseling agency affiliated with the National Foundation for Credit Counseling. Another thing to consider is to sell some stuff online. I think this works great. Every fall my wife and I get busy selling some of our kids old toys, clothes and electronics on eBay. It really helps when you go into Christmas with $500 in the Paypal account. Then we try to buy stuff used on eBay which works out great because it is like we are recycling money. We sold the Nitendo 64 and the money went toward the PS2. Wow what a concept.

Track the damage.
List all your creditors, how much you owe to each and the interest rates. Total it. Post it where you'll see it, and update it monthly. I saw a recent article on how to keep your New Years resolutions and it talked about posting your goals on the refigerator. I thought that was a good idea. I suggest the bathroom mirror as well. That way when you decide you are going to go out and party this weekend, you might remember to not put it on the credit card. Set a mini budget for the weekend of say $40 and then thats it. When it is gone you have to stop. Don't keep increasing the problem.

Create a budget and a 90-day repayment plan.
Figure out where you can cut and apply the extra funds toward your debt (see Build Your Budget for help). In the example above, you'd have to come up with $525 a month to pay off the debt in three months, and you'd pay $41 in interest. If the best you can do is $250, it will take you seven months and cost you $78 in interest. You know it is funny how you meet people that complain about being broke all the time and you find that they have a $60 per month cell phone bill, digital cable of $100, go to the movies all the time and wear only designer clothing. If you are paying off credit card debt it might be time to cut back and free up some cash. Switch to a pay as you go cell phone and don't use it much. Drop down to basic cable only and subscribe to Netflix for $9.99 per month. You really never watch all the stuff on digital cable anyway. Try buying a pair of shoes that is not a brand name and above all just plain cut back on the spending.

Hide your credit cards.
If you have to use credit, don't charge anything you can't repay in 90 days. Not only do you need to hide the credit cards, you need to stay out of the stores. It is always amazing to me how we will goto the store for bread and milk and we come out and the bill was $90. How does that happen. One thing you also need to do is when you are shopping work off a list and don't buy anything that is not on your list. It is a tough thing to do and you need discipline but it will help.

Pay strategically.
Make at least the minimum payment on all your cards to avoid late charges and any sudden increases in your interest rate. Dedicate extra funds to the cards with the highest interest rates. I really think if you are juggling multiple credit cards you need to consider some type of debt consolidation. I am not recommending a home equity loan but getting 5 or 6 different credit card bills per month can be very frustrating and hard to juggle.

Reduce your interest rate
The lower your interest rate, the more your monthly payment goes to pay down the principal you owe. This might be a good time, especially if you have a good credit record, to ask creditors to lower your interest rate. Scott Bilker, founder of, suggests letting the bank know that it will lose you as a customer if it doesn't. If they say no the first time, try again. You might score with a different customer service rep. Or you could transfer your balance to a card offering a 0% introductory rate -- but only if you'll repay your debt fully before the rate rises. Most people might be reluctant to do this type of negotiations. Consider finding a cheaper loan source like a credit union. Consolidate everything into one personal loan and the stop taking on more debt.

Get ahead of the game
To avoid the specter of holiday debt next year, credit counselors recommend that you start saving now. Hey, I already said this about setting up special savings or Christmas clubs. Here is how you do it. Divide what you spent this year by 11 (February through December), and stash the result each month in a savings account. A Christmas Club account at your bank or credit union won't pay much interest, but it will impose a penalty on any withdrawals before the holidays. If you're disciplined, you could open an account with HSBC Direct, which pays 5.1% interest, or ING Direct, which pays 4.5%. Remember this has to be done automatically, you will not have the discipline to save it manually, have your pay check deposited into your checking account and the special savings withdrawn directly from your checking account each month.

Do you look forward to large annual income-tax refunds that you use to pay down your credit-card debt in a lump sum? Moelenpah says a better strategy is to adjust withholding downward and apply the extra monthly income to your credit-card debt. And Moelenpah offers this "radical" approach to gift giving if you're carrying credit-card debt: "Maybe next year you can't afford to buy any gifts," she says. "Of course, that doesn't mean you can't give them." A box of homemade cookies may be more meaningful than another cashmere sweater, and you won't be paying for it for the next 20 years. Another thing to think about on gift giving is to set a limit. It is incredibly hard to buy something for everyone that is under $20. However, maybe that is what you have to do this year. If you don't want to disappoint your kids really consider buying used stuff. You kids won't care if the get a used Sony PSP. They really just want a PSP. Good luck and pay it down fast.

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