7 Ways Consumers are Reconciling Holiday Debt

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The holidays might be over, but their lingering financial impact remains. Many Canadians find themselves facing financial troubles when it comes to debt. The holidays force consumers to either limit the amount they spend on gifts or take out additional debt.

While some shoppers manage to pay this debt down in a few months, others find themselves overwhelmed with trying to get rid of their holiday debt. When you add that to existing debts and add interest payments, it can take years to pay off that holiday debt. And when the holidays roll around again next year, more debt will be added on.

Consumer debt is nothing new but it does negatively impact the economy. Some of the common methods that consumers are using to get out of debt result in them spending less on products.

As a retailer, it is beneficial to know the common ways consumers are reconciling debt. Stressed consumers lead to shrinking sales, which could put some retailers at risk for closure.

Using the avalanche method

High-interest rates on credit cards can make getting rid of debt challenging. One way consumers are combating this is with the debt avalanche method. This method requires putting the minimum payment towards all debts and then putting any remaining money towards the debt with the highest interest rate.

This method helps to minimize the total interest paid, which results in the debt being paid off sooner. The alternative is the snowball method, where the smallest debts get paid off first, though minimum payments are still made towards larger debts. For holiday debts, the avalanche method is typically recommended so that people can quickly back in a good financial position.

Reducing monthly expenses

Some consumers are forced to reduce their monthly expenses to put more money towards paying off their debts. Reducing monthly expenses forces people to reconsider how much money they're spending on food and entertainment. Lifestyle changes for a few months can help people tackle those holiday debts before the debts get outstanding

Some people reduce monthly expenses by not eating out. They instead make low-budget meals at home. Others choose lower cell phone plans, get rid of cable, or cancel any memberships. Some also choose to stop visiting retail stores unless absolutely necessary—it is predicted retail stores are headed for a 10 year low in 2020.

Getting side hustle

For folks that are already overwhelmed with monthly expenses and can’t find a way to reduce them further, they may need to take on a temporary side hustle until they are out of debt. A side hustle is any sort of additional job that brings in extra money.

For some people, this means taking on a part-time job at a restaurant or retail store. For others, it could mean babysitting in the evenings. Individuals with special talents, such as writing or graphic design, have the option to take on freelance work. Freelance work is nice for those with busy schedules because the work is typically done at home.

Using a low-interest balance transfer card

If someone is currently trying to pay off multiple credit cards with high-interest rates, one of the options available is a low-interest balance transfer card. A balance transfer card allows them to move their high-interest rate debt onto a credit card with a lower interest rate. This helps to consolidate debt and saves money on interest, resulting in the person getting out of debt sooner.

There are some downsides to this method. Most of the time, there will be a transfer fee. Plus, the low-interest rate will only last for a specific amount of time. If someone can’t pay off the debt during that time, they could end up increasing their debt.

Taking out a loan

Another method consumers are using is consolidating debt by taking out a personal loan to pay off credit cards. This way, they only have to worry about paying off the loan instead of multiple credit cards. Personal loans are considered an installment loan, which gets paid off in monthly installments.

Talking to a financial advisor can help people figure out the best installment loans for their situation. A potential downside is that some personal loans come with high-interest rates, especially if the individual has a bad credit score. For individuals that have a good credit score and can make the monthly payments, a loan could help them reconcile debt sooner.

Borrowing from family or friends

Those that have low credit stores might struggle to find a way to consolidate debt. They might not be able to take out a loan or be ineligible to take out a credit card with a lower interest rate. Those that are in a pinch and struggling to find a way to pay off debts might be forced to ask family or friends for money.

Borrowing from family or friends is often the last resort for people. If people end up not being able to pay back the loan, it could put a strain on the relationship. For those that choose to borrow anyways, it is recommended they immediately find a way for repayment.

Starting to plan for next year

Many people fall into the trap of overspending because they feel that material items will make their loved ones happy. However, overspending often puts them in a place of financial hardship. Some consumers are starting to plan for a debt-free holiday for next year.

One way people can avoid future holiday debt is to set money aside each month into a special holiday fund. This fund doesn’t get touched until the holidays roll around. This can help people budget when it comes time to buy gifts, allowing them to stay out of debt. It is also important to remember that some consumers are turning to online sales as a way to make smart purchases.

Ending thoughts

As household debts continue to soar and people become more sensitive to avoiding high-interest rates, consumers are finding ways to reconcile their holiday debts. And if consumers start spending less, retailers will be negatively impacted.