How to Consolidate Vacation Debt
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The spirit of giving is what makes the holiday season so special – but it saps some Americans deeper into debt.
Almost a quarter of Americans (22%) expected to go into debt in the New Year because of holiday shopping, according to a recent NextAdvisor poll. This is in addition to existing debt: The average credit card balance per American is $ 6,194, according to Experian.
People tend to feel a lot of pressure to keep up while on vacation, says Corbin Blackwell, CFP, financial adviser to robot-advisor Betterment. “There’s a lot more invitations, a lot of hype around giveaways and parties. Lifestyle activity tends to increase. “
Although the COVID-19 pandemic has kept many from traveling this year, people continue to take on debt – a phenomenon made worse by high unemployment rates in the United States. In fact, 57% of cardholders with credit card debt said they were prepared to take on more debt while on vacation, according to a creditcards.com survey.
Save money for the holidays all year round with Bernadette Joy’s $ 1 rule: If an item doesn’t come out at $ 1 or less per use, it’s probably not worth it. Focus on buying only what would be used frequently. This makes the occasional splurge both more manageable and more meaningful.
How to Consolidate Vacation Debt
If you have high balances on multiple credit cards, especially at high interest rates, it may be your responsibility to consolidate that debt into one manageable payment. Not only does this simplify debt repayment, but it can also save you money over time if you are able to get a better Annual Percentage Rate (APR). This way, you spend less interest per month and invest more in your actual principal balance.
But debt consolidation is not a quick fix. You need a debt repayment plan and a solid budget in place before you consider debt consolidation. Otherwise, you are just incurring a new form of debt. “If you’re not really going to run, signing up for a marathon won’t help,” says Blackwell.
Once you’ve worked hard to strategize for this lifestyle change, there are four main ways to consolidate vacation debt that you can consider: 0% Balance Transfer Credit Cards, debt consolidation, second mortgages and debt management plans. Each has its pros and cons, so it’s best to assess which one is best for your long-term financial health. Whichever approach you take, you’ll want to make sure that the unique APR you’re consolidating into is lower than the overall APR of the cards or loans that you’re consolidating from.
1. Intro 0% APR Balance Transfer Credit Cards
A balance transfer is when you roll the balance of one or more credit cards onto another credit card that offers a 0% lower or introductory balance transfer APR.
While such offers were a little harder to come by in 2020, these cards offer a 0% balance transfer period to entice you to open an account with them. This means that for a period of time (usually between a year and 18 months) you will not have to pay interest on the balance transferred to the credit card, which will allow you to pay off the principal more quickly.
Balance transfer credit cards are a popular option because a 0% APR is really a great money-saving option for those who want to get back on track. But if you’re not careful, it could be an invitation to spend more, Blackwell warns.
People often think they have a clean slate once they make a balance transfer to a 0% APR card, but that’s not the case, says Bernadette Joy, founder of Crush Your Money Goals and NextAdvisor contributing author. At the end of this introductory PRA period, “they come to me… and say, ‘I didn’t do anything with that. All I did was delay the inevitable. ”
If you decide to consolidate debt on a balance transfer credit card, make sure you make the payments on time and in full – and that you can afford to pay off your debt before the APR offer ends. 0% balance transfer. Otherwise, you could be stuck paying interest on that balance and fall back into a cycle of debt.
2. Debt Consolidation Loans
Debt consolidation loans are a type of personal loan that allows you to combine multiple types of debt – such as credit cards, personal loans, and medical bills – into one fixed rate payment.
They are usually unsecured, which means you won’t have to secure the loan with an asset as collateral. One of the advantages of a debt consolidation loan is that it has a fixed repayment period (often three to five years) during which you have to repay the loan. This means you’ll know exactly when the debt is paid off, assuming you can stay on track with the same monthly payments over time.
“If you have really manageable debt… and accidentally miss payments that you could have easily made, consolidating into one loan makes a lot of sense,” says Blackwell. But keep in mind: “This is not a magic potion. It’s really just to help you get organized. ”
3. Second mortgage
If you are a homeowner, another option that you may be considering to consolidate your vacation debt is a home equity loan or home equity line of credit (HELOC). Both of these debt consolidation methods allow you to borrow against the value of your home and use the funds to pay off your balances. Second mortgages can be more difficult to obtain compared to the other three options we just covered because you will have to meet a loan-to-value threshold (LTV), go through a full underwriting process (similar to getting a mortgage loan), and pay the administration fees and closing costs. And they’re risky, too: if you fail to pay, you could lose your home due to foreclosure.
Instead of taking out a mortgage or HELOC, Joy suggests refinancing to take advantage of historically low interest rates, if your credit is good to excellent. The cash flow freed from a lower interest rate or a shorter repayment period may be allocated to your debt.
4. Debt management plans
If you are feeling underwater with debt, seeking help from a nonprofit credit counseling agency can help. Credit counselors can help you budget, negotiate your debt terms with your creditors, and decide which loan or credit card to use. We recommend that you consult agencies approved by the National Foundation for Credit Counseling.
How to Avoid Vacation Debt Next Season
Vacation debt is not inevitable. While the pressure to decorate, shop for gifts, and travel can be high, there are ways to cut your budget without reducing the joy of the season.
1. Talk to your family about giving
Having gifts for everyone in the family can make you feel like Santa for the day, but that’s just not doable for a lot of people, especially those with large families.
Joy says she felt that pressure in her grandfather’s house on Christmas Eve, where as many as 30 family members gathered. “No one has ever said it, but it is understood that you should give everyone a gift.” One year, she suggested an organized gift exchange with secret Santa Claus between adults instead of the typical tradition of one gift per person – and the proposal met with wide agreement and relief.
People are often afraid to move the boat for fear of looking like the Grinch, but you might find that you aren’t the only person overwhelmed. To that, Joy said, “Let’s normalize talking about gifts.”
2. Plan all year
After Thanksgiving, many people find themselves scrambling for money to buy gifts, but that isn’t necessarily the case.
“A lot of people budget for summer vacation, but forget to pack gifts along the way,” says Blackwell. Factoring in this major expense into your monthly budget – and even adding the funds to a separate savings account – can go a long way in avoiding debt. The intentional economy also means that you may be able to buy a bigger, more expensive gift for a loved one, instead of scrolling through Amazon or wandering around Target in the last second possible.
3. Resist the siren call of commercials
If you feel the temptation to overspend, know that it doesn’t come from moral weakness. “It’s by design,” says Joy. “A lot of people are illuminated during the holidays. If everywhere you go is telling you to buy, to buy, to buy something… you have to recognize that is what is happening. “
Rather than feeling resigned to relentless Christmas sales advertisements, Joy says the achievement can be rather uplifting. “You have more power to say no than you think.”