Tips for Recovering from Last Year’s Holiday Debt — and How to Avoid It in the Future
Does holiday credit card debt still loom large in your world? If so, you’re not alone.
January 29, 2021
Now that we’re about a month into the new year and have had a chance to catch our collective breath, we wanted to survey the landscape of holiday debt, and look at ways to help overcome it in 2021.
If you overspent on gifts this past holiday season, you are not alone. Holiday spending hangovers are all too common in the U.S., and like most aspects of 2020, the trend was exacerbated by the coronavirus pandemic.
According to a recent Tally survey, Americans who took a financial hit from the crisis felt more obligated to buy holiday gifts than those who weren’t negatively impacted (84% versus 67%). Of those who felt compelled to buy holiday gifts, more than half of respondents said it’s because they wanted to spread joy and bring cheer to others during the pandemic.
But pandemic or no pandemic, taking on credit card debt can be detrimental to your financial health. Read on for a rundown of the relationship between social distancing and holiday debt, as well as tips for paying down your balances and achieving financial wellness this year.
Why social distancing may have resulted in more holiday debt
As we’re all acutely aware, it wasn’t possible for many families to get together physically over the holidays. While this was undoubtedly difficult, video chats, social media updates, and gift-giving provided ways to connect and show love from afar.
Though unintended, one result of social distancing was an uptick in consumer debt. In fact, our recent survey found that 68% of Americans were willing to go into debt to pay for gifts for their loved ones this season. As we mentioned, those who took a financial hit were even more inclined to buy gifts, even if it meant putting them on a credit card.
Obligatory gift-giving wasn’t limited to family either this holiday season. Roughly 15% of survey respondents said they’d take on credit card debt to fund holiday presents for friends—a 6% increase from 2019. On a similar note, 6% were willing to put gifts for coworkers on a credit card compared to only 4% the previous year. As with family gifting, people who struggled financially due to the coronavirus pandemic were slightly more likely to take on credit card debt to buy gifts for friends and colleagues.
Holiday debt: 2020 vs. 2019
While 2020 posed financial challenges for many, fewer Americans incurred holiday debt than the previous year. This holiday season, roughly 31% took on debt, versus 44% in 2019. That being said, people borrowed more money on average to pay for holiday expenses. The average dollar amount in 2020 was $1,381, which was a substantial increase from $986 in 2015.
Credit cards were the go-to method of paying for holiday purchases this year, with 56% of shoppers charging items. People who paid the balance in full avoided credit card debt, but 89% say they’re unable to pay it off the first month. What’s more, 18% say they plan to make only the minimum monthly payments.
How long does it take to pay off holiday debt?
The holiday season is a few months long, especially in the context of gift-buying. An analysis from the National Retail Federation showed that 42% of shoppers started the process earlier than usual this year. By early November, nearly 60% had started holiday shopping — a 50% jump from a decade ago. If you do tend to start your holiday shopping early, it’s worth considering next year paying off your monthly balance in full to avoid any holiday debt.
If you’re among those who weren’t able to pay your balance in full this year, you might be wondering how long it’ll take you to pay off your holiday debt. This depends on various factors, including your credit card balance, the interest rate, and how much you’re able to pay each month.
While this probably goes without saying, paying only the minimum monthly payment will take the longest. Not only that, but you can expect to pay maximum interest. In some cases, making only minimum payments can result in shelling out more than twice the original amount you borrowed.
Crunching the numbers
As an example, let’s say you took on the average of $1,381 in credit card debt this holiday season. With an average APR (annual percentage rate) of 18%, you’d accumulate 1.5% (18% divided by 12 months) of the balance each month until it’s paid off.
So, if you’re able to pay $200 a month, it would take you roughly eight months to pay it off, and you’d pay $88 in interest. If you can pay only $100 a month, it would take you about 16 months, and you’d end up paying $178 in interest.
Now let’s say the minimum amount due is $25, and that’s all you’re planning to pay each month. It would take you 119 months to pay off your credit card. That’s nearly 10 years to pay off expenses for just one holiday season. Furthermore, you’d pay $1,580 in interest for a total of $2,961—more than double the amount of your initial purchases.
How to pay off holiday debt
If you have holiday debt from 2020 (or multiple years), your finances don’t have to be totally doomed. Even if you can’t pay the balance in full, you can minimize the amount of interest you pay and become debt-free sooner than later. Here’s how to pay off credit card debt from the holiday season.
Add it up
Amid the hustle and bustle of holiday shopping and the rush of festive cheer, it’s easy to put credit card debt in the back of your mind. However, it’s best to keep track of your purchases in real time so you know how much debt you’re racking up.
If you didn’t add up your holiday charges in real-time, that’s okay. Go back and review every item, taking note of your balance and interest rate. If you used multiple credit cards, the Tally app can help you record and track all this information in one place.
Make a budget
The next thing you’ll need to do is figure out how you’ll afford your monthly payments. How much can you pay toward your balance each month? Making a budget can help you come up with this number and ensure you always have the available funds.
If you’re partial to spreadsheets, they can be very useful for creating a budget. That said, there are also budgeting apps that make it easy to track your spending, stick to a budget, and set financial goals.
Enter all essential living expenses, such as your housing payment, transportation costs, utilities, and groceries. Then factor in other debts, like student loans. What’s left over is your disposable income, which you can use to pay off your holiday debt. Later in the year, you can create a holiday budget to help prep for holiday shopping.
Consider using your tax refund or stimulus payment
With tax season right around the corner, it could mean you’ll be getting a tax refund that you could use to pay off your holiday debt. Even if you only get a few hundred dollars back, it could be enough to cut your debt in half or at least give you a head start on paying it off.
Besides tax refunds, many people are also expecting to receive a stimulus payment (AKA economic impact payment) in January 2021. Adults can get up to $600 each, plus an additional $600 per child. If you don’t have any other urgent financial needs and are wondering how to spend your stimulus check, paying off credit card debt with the money is a great choice. Using your stimulus payment to pay the balance in full might also boost your credit score.
Once you’ve tackled 2020 holiday spending, it’s important to plan accordingly to avoid going into debt again this year. Starting now, consider some new ways to save money for holiday gifts in 2021, such as setting aside a little money each month so that you have enough cash by the end of the year.
A lot of banks offer holiday savings accounts for this exact purpose. If you plan ahead and make a New Year savings plan, you can have a debt-free holiday next year.
How Tally can help you and your finances in 2021
Tally is here to help you reel in your spending and achieve financial wellness in 2021. Paying off credit card debt with as little interest as possible is a critical piece of the puzzle, and our simple app makes it easy.
It takes information from all your accounts, factors in your spending habits, then recommends a payment amount. Best of all, you only have to make one monthly payment to pay off all your credit cards.
Download the Tally app to get started.