6 tips to pay off holiday bills

Associated PressFebruary 2, 2013 

Now that the holiday bills have arrived, many face the daunting task of whittling down the mountain of often high-interest credit card debt before it gets out of control.

That task is made more difficult this year: Most paychecks have been reduced because Congress and the White House allowed a two-year reduction in Social Security payroll taxes to lapse at the end of December.

Although many cardholders have kept their credit card debt relatively low since 2010, the average debt is expected to grow by roughly 8 percent to $5,446 by the end of this year. That’s the highest level in four years, according to credit-reporting firm TransUnion.

That suggests some consumers could end up carrying at least a portion of their 2012 holiday debt, and paying interest on it, well into 2013.

Here are six tips on how to detox your finances this year.

1. Tally up what you owe.

First on the debt to-do list is to take stock of the damage. That means reviewing credit card bills, bank statements, and other accounts to determine how much you owe and how that translates into monthly payments.

Experts also recommend getting a copy of your credit report if you haven’t done so in more than a year.

“That way, you’ll know exactly where you are, in terms of what’s being reported to the credit-reporting companies,” said Rod Griffin, director of public education for credit-reporting firm Experian.

Consumers are entitled to get a free credit report from the three nationwide credit-reporting companies every 12 months. Copies can be obtained at AnnualCreditReport.com.

A credit report can help you understand how your debt, and your payment history, will be perceived by potential lenders.

It also underscores the need to bring down card balances, as high balances are viewed as a sign of risk.

2. Draw up a payment plan.

Paying down credit card debt requires discipline.

One oft-advised strategy for borrowers carrying balances on two or more credit cards is to rank the cards by their interest rates and then make the biggest monthly payment on the card with the highest interest rate. For the rest, only make the minimum monthly payment. The process is repeated once the card with the highest rate is paid off.

This approach reduces the portion of payments going toward interest.

Griffin says some borrowers might be better off funneling the biggest payments to the card with the lowest overall balance. That enables a cardholder to pay off a card entirely more quickly. This can provide a psychological boost and reaffirm that it’s possible to conquer your debt.

Remember this: If you used credit cards to take advantage of holiday sales, you may quickly lose any savings because you’re allowing balances to linger.

3. Consider a balance transfer

A survey by Consumers Union found that half of the respondents are racking up interest charges by carrying a balance.

For those who don’t have a pile of cash that they can draw upon to pay down their debt, the next best option is to lower the interest charges.

You can ask your credit card issuer to do you the favor, but don’t count on it. A more realistic option is to consolidate your card balances into another card with a lower interest rate.

Many card issuers extend balance transfer offers, with some providing an introductory period of a year or more to pay off the transferred balances at no interest. However, that’s not set in stone.

“Your introductory period is usually forfeited if you miss a payment,” said Bill Hardekopf, CEO of LowCards.com.

Banks also will typically charge a fee of 3 percent to 4 percent on the amount transferred.

The average interest rate on balance transfer cards is 12.59 percent, according to CreditCards.com. That’s the rate borrowers can expect to pay after the introductory period on their cards ends. On cards offering a variable interest rate, borrowers can end up having a lower or higher interest rate.

Worried about taking on more credit cards? Griffin of Experian said credit scores put less emphasis on the number of accounts borrowers have than on how those accounts are used – namely, if your balances are high relative to the amount of credit you have available.

Experts differ on the wisdom of resorting to other options. “With a credit card, the worst thing that can happen is you default, your credit will go down,” says Norma Garcia, manager of the financial services program for Consumers Union, publisher of Consumer Reports. “With a home equity line of credit, that could have implications for your homeownership and your continued relationship with that bank.”

4. Make a budget, follow it

Make a budget of your fixed household expenses, such as your mortgage or rent, utilities, car loan, insurance, and so on. Carve out a realistic amount of money for more variable costs, such as gas, groceries and entertainment.

Once you figure out a monthly plan that allows you to pay down your card debt, even if it means scrimping here and there, stick with it. The key to doing that is to remain on top of expenses.

Computer and mobile phone apps designed for tracking expenses abound. Some of the most popular apps include Mint.com and Pageonce, which draw data from bank, credit card and other accounts to give users a comprehensive view of their finances and spending. They also help organize and track expenses, sending e-mail alerts when bills are due, among other features.

5. Use credit, don’t abuse it

The best way to get back on the right financial track is to get in the habit of paying off any charges on cards right away. It helps to reframe one’s understanding of what credit is, Garcia says.

“When you use a credit card, you’re tapping into a deficit – unless you plan to pay for it – rather than a reservoir of savings,” she said. “The person should ask themselves, ‘Can I pay off that balance every month?’ and if I can’t, what’s that going to cost me?”

6. Get help

Feeling overwhelmed by debt? Counseling agencies approved by the U.S. Department of Housing and Urban Development offer free credit counseling and advice on making a personal budget and dealing with creditors. They can be found on www.hud.gov .

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