Christmas presents, holiday accommodation, travel expenses and those cheeky extra bottles of wine – ideally, these costs should have already been factored into our budgets throughout the year. The reality for many of us is that these extra expenses go straight on the credit card. Unless you pay off this debt before the bank starts charging interest, you could end up paying much, much more for your holiday break than you anticipated.
That bargain $250 airfare? If you chucked it on your credit card and only make minimum payments, it’ll take more than three years to pay off. Adding on the interest means that $250 flight will actually cost you $351. Not so cheap.
Carrying consumer debt such as your credit card and HPs can also affect your borrowing power. Banks will look carefully at what you already owe before letting you take out a mortgage. Sometimes, it’s less about the amount you owe, and more about how volatile you appear. To the bank, debt is risk.
How to get out of that Christmas credit card hole
Every day that you carry a balance on your credit card, it’s costing you money in interest, fees and even insurance. Your goal is to get rid of that debt as quickly as possible. That means knuckling down, budgeting, paying more than the minimum off your credit card each month, and making sure you have the cash to cover any other debt repayments too.
Debt consolidation can also help you reduce stress, have an easier time with budgeting and pay your loans off faster.
Look into a debt consolidation loan
While borrowing money to pay off your debts might seem counterintuitive, debt consolidation can be a really smart move if you’re faced with a bunch of HPs, store card debt, or a maxed-out credit card. Instead of juggling many different debts, each with its own interest rate and payment schedule, you have one simple loan. And unlike credit cards, which can have up to a 30% interest rate, personal loans can have a much more manageable interest rate. You can relax knowing you aren’t racking up extra penalties for forgetting a payment, or being dragged down by your credit card’s astronomical interest rate.
Some things to consider before consolidating your debts:
Debt consolidation loans can be a good idea, but there are some things to be wary of:
- Make sure you can meet the repayments on the new loan, or you are digging yourself a bigger hole.
- If you’re paying lower amounts each month, it could mean you’re paying more overall – ask for a breakdown of what your total amount, including interest will be, so you have a clear understanding. Compare this against the existing total debt amount.
- Look out for extra fees and charges, including ones that you’ll be charged if you change anything, make late payments or default. You may even be charged extra for paying off your loan faster.
- Choose your lender carefully. Banks will often offer lower interest rates on their personal loans but are more careful about who they lend to. They’re always a good place to start though – non-bank lenders will almost certainly charge higher interest. Only use legitimate banks or financial institutions.
- You’ll have already spent money on setting up your original loans. These are called establishment or documentation fees, and your consolidation loan will add another set of fees. Make sure you add these to your calculations before taking the plunge.
Look at increasing your mortgage
If you’re a homeowner, one of your options is to increase your mortgage. Other thans the holiday debts, you may also have ongoing payments on big ticket items like a car or boat. The interest rates on these types of loans will be much higher than your mortgage, and you could save a lot in the short term by bundling them all into your long-term home loan.
If you already have a revolving credit facility on your mortgage, that’s even better. You can cover your debts and save massively on fees and interest. But don’t forget that the term of the loan remains fixed, so you’ll be paying more each month to cover that extra debt.
Crunch the numbers on your mortgage to find out what your home and all your debts are really going to cost. Take your weekly mortgage payment, multiply by 52, and again by the number of years left on your mortgage term. (For fortnightly payments, multiply by 26.) How much the bank will make from your loan over the term might shock you into saving up for next holidays!
Have happy holidays – within your budget
If you spent a lot more than you expected to during this latest holiday period, you don’t need to suffer. A consolidation loan that will gather up all your debt might be the answer. Or you can increase your mortgage and pay off those debts at a much lower interest rate.
Whatever you do, make sure you understand the gritty details – keep an eye on fees, charges, penalties for late or missed payments, or even early repayment costs. Even more important, get a breakdown to find out the real total of your debt, including interest.
Are you struggling with holiday debts? Talk to Float for ways to manage them effectively and save yourself some stress.