Spending Hangover? Time For a Financial Cleanse
How to refinance your debt if you overdid it on holiday gifts
The magic of December has turned into the hope of January as Americans resolve to make themselves thinner, richer, healthier and happier. But hope may turn to dread when they get the credit-card bills for their December shopping sprees.
Americans were projected to spend an average of $781 on Christmas gifts in 2014, up from $704 in 2013. Add that hefty bill to the $3.27 trillion of debt that Americans collectively hold and we’re in for a mighty spending hangover in 2015.
Unfortunately, most of those purchases were made with credit cards charging sky-high interest rates — 15 percent or more for the average bank card and 24 percent or higher for store credit cards. If you spent $800 on a 24 percent store card and only pay back $25 a month, you’ll wind up owing a staggering $489 in interest.
(MORE: 6 Credit Score Myths Debunked)
Little surprise that, based on previous years, more people will Google “get out of debt” this week than any other week of 2015. So, here’s my advice to give yourself a financial cleanse for your holiday spending hangover:
Try to Refinance Your Debt
The key is not just having the self-discipline to get debt-free (or as close to that as possible), but speeding up your repayment efforts by finding a way to make your debt cost less.
Just as you shop for low rates on mortgages, you should do the same with your credit card debt. Whittle your credit-card interest by comparing banks and credit unions for the best deal and ditching your high-cost store credit cards.
If you have the self-discipline, are committed to spending less and putting more money towards debt repayment, refinancing your credit-card debt can be a great tool. Refinancing at a lower rate can save you a lot of money. For example, if you have $5,000 of debt at a 17 percent interest rate and transfer it to a credit union card charging 3.99 percent, you could save $3,281 of interest.
In order to secure a worthwhile balance transfer offer (where you transfer money owed on your current card to a new card), you need a good credit score — above 700. To refinance through a reasonable personal loan, you’d likely need a credit score above 650. Generally speaking, you also can’t be behind on any payments.
Also, banks will look at what’s known as your “debt burden.” To do so, they use a formula that takes all your monthly payments (such as your rent or mortgage, car loans, student loans and credit card debt) and divides the total figure by your monthly income. In order to get the best refinancing deals, you typically need a debt burden of less than 40 percent.
If your credit score is high and your debt burden is low, you’ll be in great shape to benefit from a balance transfer or a personal loan.
If your credit score is too low, however, make a New Year’s Resolution to raise it. The best way to improve your score is to make consistent, on-time payments and to bring down your total balances. After six to 12 months, you can use your improved score to shop for a better deal.
If you are drowning in debt with a debt burden well above 50 percent, consider meeting with a nonprofit consumer credit counselor. Negotiating a workout with your creditors may be your best option.
How to Refinance Your Debt
If you have debt you want to refinance, shop for the best deal on a balance transfer or a personal loan by comparing rates on the Internet. While the best balance-transfer deals are usually with credit unions, the easiest application processes are usually with the big banks.
Once you are approved for the card, you’ll be asked for the credit card number of your existing debt and the financial institution will make a transfer on your behalf. It is very easy.
If you want to snag a credit union’s deal, you will need to join it, apply for its credit card and then transfer your balance. You can usually join a credit union for free.
To take out a personal loan, you’ll probably be given a check or a wire transfer to your checking account and then use that money to pay off your existing credit cards.
5 Rules for Balance-Transfer Cards
If you decide a balance-transfer card is right for you, follow these five rules:
1. Don’t put new charges on the new or old credit card. Your goal is to get debt-free. Don’t fall for the temptation of spending more.
2. Get the transfer done within 30 days of opening your credit card. The quicker you transfer, the more money you will save.
3. Keep paying interest on your old credit card until the transfer is complete. It can sometimes take a few weeks for the payments to clear and you don’t want to be hit with any late fees.
4. Set up automatic payments. This way, you’ll force yourself to pay back money every month, on time.
5. Try to pay off the balance during the low-rate promotional period. If you can’t, then make a diligent repayment plan that will begin once the promotional offer expires.
3 Rules for Getting a Personal Loan
If you decide to take out a personal loan, follow these three rules:
1. Don’t ring up new charges on your old credit cards. Cut up those cards or put them in the freezer, so you won’t be able to use them.
2. Put as much money as you can towards the payment each month. Most personal loan contracts let you pay back more each month.
3. Beware any optional insurance protection a financial institution may try charging you at the time of the loan closing. If you want insurance, go out and shop for the best deals. Trust me: they rarely come at the end of a loan sales process.