In our second annual holiday debt survey, MagnifyMoney found consumers who took on debt this holiday season will kick off the New Year with an average of $1,003 worth of new debt. That is up from $986 in 2015, for a year-over-year increase of 1.7%.
What’s troubling about this year’s findings is that most people who went into debt didn’t plan on it. We found the vast majority — 65.2% — of consumers who took on debt did so unexpectedly this year, and didn’t budget for the extra expenses.
It’s easy to imagine scenarios in which people might spend more than they can afford over the holidays. Last-minute gifts, family emergencies, and, for some, fewer work hours, can all add up to a hefty credit card bill if not planned for in advance.
And people who took on debt will need months to pay it off. Nearly half (46%) predict they’ll need four months or more to pay off their holiday debt, or will only make the minimum monthly payments.
Even a seemingly meager amount of debt can quickly balloon over time if it isn’t paid off aggressively. We can illustrate this using the MagnifyMoney Credit Card Payoff Calculator.
A person carrying an average debt load of $1,003 who makes one $25 minimum payment per month would need 58 months (4.8 years) to pay off their debt. That calculation assumes an average annual percentage rate (APR) of 16%.
On top of paying off their principal balance of $1,003, over that time they would pay an additional $442 worth of interest for a grand total of $1,445.
Credit cards were the most common form of debt overall. In fact, even more consumers reported using credit cards for holiday debt this year than in 2015 — 59.9% vs. 52%.
How to free yourself from holiday debt
Preparing for the new year, MagnifyMoney has published the second edition of its free 45-page Debt Free Forever e-book that you can download to prepare your action plan, tailored to whether your situation calls for a quick switch to a lower rate or more significant debt payoff advice.
Here are key tips to help you beat the debt cycle:
1. Understand where your money actually went. The best way to fix your spending problem is to understand where the money has actually gone. And there are great apps, like LevelMoney or Mint, which can help you understand where your money has gone over the last three months. We particularly like LevelMoney, because it splits your expenditure into fixed, recurring expenses and variable expenses.
2. Review your credit report from all three reporting agencies. You need to know what is on your credit report in order to build a good credit score. You can download your report for free at AnnualCreditReport.com for all three bureaus.
3. Understand your credit score and put together a plan to improve your score during 2017. People with the best scores never charge more than 10% of their available credit and pay their bills on time every month. Not only is that good for your score, but it is good for your wallet. And you can now get your official FICO score for free in a number of places. Otherwise, you can get your VantageScore at sites like Credit Karma.
4. If you have a good credit score, your debt can probably be refinanced. Mortgages, student loans, auto loans, and credit cards (with a balance transfer or personal loan) can all be refinanced. Find ways to lock in much lower interest rates now before rates go up to help you pay off your debt faster. But avoid extending the term to get a lower payment. The biggest trap people fall into with refinancing is that they lower their rate and extend their term, like taking a 30-year refinance on a mortgage that’s set to be paid off in 15 years. By doing this, you might end up paying more money in the long run. Second, be careful before you refinance federal student loans, because you give up valuable protection.
5. Paying off the debt with the highest interest rate first will save you the most money (the debt “avalanche” method), but a recent study shows you’re more likely to stick to paying off your debt if you pay the debt with the smallest balance in full first (the debt “snowball” method), even if it doesn’t have the highest interest rate. That’s because small “wins” help build momentum to keep you motivated.
6. Automate all of your payments. Data has consistently shown that automating decisions greatly increases the likelihood of achieving your goals. To build that emergency fund, set up automatic transfers from your checking to your savings account. (Even better, get a higher interest rate online account and keep it completely separate from your checking account.) To build your retirement savings, automate your 401(k) or IRA contributions. And to pay your credit card bill, automate your monthly payments.
7. “Net worth” is not just a concept for the rich, and you need to focus on your net worth now. Net worth is a simple concept: it is what you own minus what you owe. Building wealth and being financially responsible means you are building your net worth. A good salary doesn’t help your net worth if you’re spending it all on your car and clothes and not saving each year. Focus on the right number: building your net worth.
MagnifyMoney is a price comparison and financial education website, founded by former bankers who use their knowledge of how the system works to help you save money.