How to Consolidate Holiday Debt

Photo to accompany story about consolidating holiday debt. Getty Images

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The spirit of giving is what makes the holiday season so special — but it’s sinking some Americans deeper into debt.

Nearly a quarter of Americans (22%) were expecting they would carry debt into the new year due to holiday shopping, according to a recent NextAdvisor survey. This is on top of 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 during the holidays, says Corbin Blackwell, CFP, financial advisor for the robo-advisor Betterment. “There are a lot more invitations going out, a lot of hype around giving gifts and going to parties. Lifestyle activity tends to go up.”

Although the COVID-19 pandemic prevented many from traveling this year, people are still taking on debt — a phenomenon exacerbated by high unemployment rates in the United States. In fact, 57% of cardholders who carry credit card debt said they were willing to go into further debt over the holidays, according to a creditcards.com survey.

Pro Tip

Save money for the holidays year-round using Bernadette Joy’s $1 rule: if an item doesn’t come out to $1 or less per use, it’s probably not worth it. Focus on purchasing only what would be frequently used. This makes the occasional splurges both more manageable and more meaningful. 

How to Consolidate Holiday Debt

If you have high balances across multiple credit cards, especially at high interest rates, it may behoove you to consolidate this debt into one manageable payment. Not only does it make debt payoff simpler, it can also save you money over time if you’re able to secure a better annual percentage rate (APR). That way, you’re spending less on interest per month and putting more toward your actual principal balance.

But debt consolidation isn’t a silver bullet. You need a plan to pay off the debt and a solid budget in place before considering debt consolidation. Otherwise, you’re just taking on a new form of debt. “If you’re not going to actually run, signing up for a marathon won’t help you,” says Blackwell.

Once you’ve done the hard work of strategizing for this lifestyle change, there are four main ways to consolidate holiday debt you can consider: 0% APR balance transfer credit cards, debt consolidation loans, second mortgages, and debt-management plans. Each has its pros and cons, so it’s best to evaluate which one is right for your long term financial health. No matter what approach you take, you’ll want to make sure the single APR you’re consolidating into is lower than the aggregate APR of the cards or loans 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’s offering a lower or introductory 0% balance transfer APR. 

Though such offers have been a bit harder to come by in 2020, these cards offer an introductory 0% balance transfer APR period to entice you to open an account with them. This means for a period of time (usually anywhere from a year to 18 months), you won’t have to pay interest on the transferred balance on the credit card, allowing you to pay down the principal quicker.

Balance transfer credit cards are a popular option because 0% APR truly is a great money-saving option for those who want to get back on track to financial health. 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 have completed a balance transfer to an 0% APR card, but that’s not the case, says Bernadette Joy, founder of Crush Your Money Goals and NextAdvisor contributing writer. At the end of that introductory APR period,“they come to me … and say, ‘I haven’t done anything with it. All I’ve done is delay the inevitable.’” 

If you do decide to consolidate debt onto a balance transfer credit card, make sure you make payments on time and in full — and that you can afford to pay off your debt before the intro 0% balance transfer APR offer ends. Otherwise, you could be stuck paying interest on that balance and lapse back into a cycle of debt.

2. Debt consolidation loans

Debt consolidation loans are a type of personal loan that allow you to combine multiple types of debt — such as credit cards, personal loans, and medical bills — under one fixed-rate payment. 

They’re typically unsecured, meaning you won’t have to secure the loan with an asset as collateral. One benefit of a debt consolidation loan is that it has a fixed repayment period (often three to five years) in which you must pay off the loan. This means you’ll know exactly when the debt will be paid off, assuming you’re able to stay on track with the same monthly payments over time.

“If you have really manageable debt … and you’re accidentally missing payments you could’ve easily made, consolidating into one loan makes a lot of sense,” says Blackwell. But keep in mind: “It’s not a magic potion. It’s really just to help you get organized.” 

3. Second mortgages

If you’re a homeowner, another option you may be considering to consolidate holiday debt is a home equity loan or a home equity line of credit (HELOC). These two debt-consolidation methods allow you to borrow against the value of your home and use the funds to pay down your balances. Second mortgages can be more difficult to get compared to the other three options we’ve just covered because you’ll need to meet a loan-to-value (LTV) threshold, undergo a full underwriting process (similar to getting a mortgage), and pay application fees and closing costs. And they’re risky, too: If you default on payments, you could lose your home to foreclosure.

Instead of taking out a home equity loan or HELOC, Joy suggests refinancing to take advantage of historically low interest rates, if you have good-to-excellent credit. The freed-up cash flow from a lower interest rate or a shorter repayment period can be put toward your debt.

4. Debt-management plans

If you’re feeling like you’re underwater with debt, then seeking help from a nonprofit credit counseling agency may help. Credit counselors can help you build a budget, negotiate the terms of your debt with your creditors, and decide which loan or credit card should be prioritized. We recommend looking at agencies endorsed by the National Foundation for Credit Counseling.

How to Avoid Holiday Debt Next Season

Holiday debt isn’t inevitable. While the pressure to decorate, buy gifts, and travel can be high, there are ways to reduce 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 Claus for the day, but it’s simply not feasible for many people — especially those with large families. 

Joy says she’s felt this pressure going to her grandfather’s house on Christmas Eve, where as many as 30 family members would gather. “No one ever said it, but it’s understood that you should give everyone a present.” One year, she suggested an organized Secret Santa gift exchange among the adults instead of the typical one-gift-per-person tradition — and the proposal met with wide agreement and relief.

People are often afraid to rock the boat for fear of seeming like the Grinch, but you may find you’re not the only person overwhelmed. To that, Joy says, “Let’s normalize talking about gift giving.”

2. Plan all year

After Thanksgiving, many people find themselves scrounging for the money to buy gifts, but it doesn’t have to be this way. 

“A lot of people budget for summer vacation but forget to budget for gifts along the way,” Blackwell says. Factoring this major expense into your monthly budget — and even adding the funds to a separate savings account — can go a long way toward avoiding debt. Intentional saving also means you may be able to splash out for a larger, more expensive gift for a loved one, instead of scrolling through Amazon or wandering around Target in the last possible second.

3. Resist the siren call of ads

If you’re feeling the temptation to overspend, know that it’s not coming from some moral weakness. “It’s by design,” Joy says. “A lot of people are being gaslit when it comes to the holidays. If literally everywhere you go is telling you to buy, buy, buy something … you have to recognize that’s what’s happening.”

Rather than feeling resigned to relentless Christmas sale commercials, Joy says the realization can instead be empowering. “You have more power to say no than you realize.”