How to Consolidate Holiday Debt
After the holidays, the debt you’ve built up to buy gifts can feel heavier than Santa’s bag of toys. However, you might be able to lighten the load by consolidating your holiday debt.
“Debt consolidation essentially means combining debts ‘under one roof’ at a good interest rate so they are easier to repay,” says Sean Fox, co-president of Freedom Debt Relief, a for-profit provider of debt settlement services.
By putting the debt you owe from holiday spending “under one roof,” you can lower the cost to repay what you’ve borrowed and streamline your bills.
Still, though, consolidation doesn’t mean you’ve instantly wiped out your holiday debt; you’re still responsible for paying it. You’ve just made it easier to pay.
Experts offer the following five options for consolidating your holiday debt so that you’re not feeling like a Grinch when it comes to paying off what you owe:
1. Get a debt consolidation loan.
This is probably the most straightforward way to consolidate your holiday debt. Through a bank, credit union, peer-to-peer lender (like Lending Club), online personal loan lender (like SoFi) or another lending source, you can apply for a loan to put two or more debts into one bucket — credit cards bills, medical bills, other loan payments and so forth.
Debt consolidation loans are unsecured, meaning they’re not backed by property such as a home or a car.
You should look for a fixed interest rate on a debt consolidation loan that’s significantly lower than the interest rates on the debts you’re combining. That way, it’ll end up costing you less to borrow the money — and that’s the whole idea behind debt consolidation.
Also, pay attention to whether the lender charges what’s known as a loan origination fee. Fox says this fee normally ranges from 1% to 5% of the loan amount. So, if you borrow $8,000 and the fee is 4%, you’ll have to pay an extra $320.
If you’ve got good credit, you can score an interest rate on a debt consolidation loan as low as about 5%. By comparison, the average interest rate on a credit card was about 13% as of August 2017, according to the Federal Reserve’s latest G.19 consumer credit report.
But watch out if you’ve got bad credit: Some debt consolidation loans hit high-risk customers with interest rates above 30%. Chances are, a loan with an interest rate that high will hurt, not help, you.
No matter what the interest rate is for a loan, debt consolidation doesn’t give you permission to go on a post-holiday shopping spree.
Before you apply for a debt consolidation loan, be sure to check your credit report and credit score. You might be able to fix mistakes on your credit report or make changes to raise your credit score so that you’ll receive a lower interest rate on the loan. The better your credit score, the lower your interest rate is likely to be.
Fox stresses that a debt consolidation loan is great for someone who’s committed to erasing holiday debt, as the loan comes with a strict payment schedule and specific monthly payment amounts. But if you’re already running into trouble paying bills, a debt consolidation loan probably isn’t the ideal method for simplifying your finances.
2. Accept a balance-transfer offer.
A lot of credit card issuers enable you to transfer all or part of a balance from one credit card to another.
Generally, a balance-transfer offer involves a 0% interest rate for a certain period of time, such as 12 months. If it’s a 12-month offer, this means you won’t be charged any interest on the amount you’ve transferred if you pay it off in full within that period.
“If you go this route, store all your credit cards away so you do not rack up more debt,” Fox says.
Keep in mind that a balance-transfer fee, like 3% of the amount being transferred, might be attached to the offer. So, if you’re switching $10,000 from one card to another, you’d pay $300 if the balance-transfer fee is 3%. In the end, though, you’ll likely save money with a balance transfer even if you’re charged a balance-transfer fee.
If you decide a balance transfer is right for you, try to choose a card that has no balance-transfer fee and no annual fee. Both fees will eat into any savings you gain from a balance transfer.
3. Tap into the value of your home.
If you’ve got enough equity in your home, one path for debt consolidation could be getting a home equity loan or a home equity line of credit. Both lending options allow you to borrow money based on how much your home is worth minus how much you owe on your mortgage.
Fox cautions, though, that it’s risky to use a home to pay off unsecured debt, such as credit card bills.
4. Borrow from your retirement plan.
While this isn’t the best option for holiday debt consolidation, it is an option.
Typically, you can borrow from your 401(k) or other employer-sponsored retirement account to pay off debt as long as you repay the amount borrowed within five years, Fox says. If you fail to repay the entire amount before the deadline, you’ll be stuck with hefty taxes and penalties.
Since this money is intended for your retirement, it should be treated as a last resort for debt consolidation, Fox says. He warns that if you leave the job that’s tied to your retirement account, the amount you borrowed to consolidate debt will be due right away.
5. Enroll in a debt management plan.
If you’re already overwhelmed by debt and your holiday spending has made the situation even worse, it might be time to try a debt management plan.
All over the country, nonprofit credit-counseling agencies offer debt management plans. Through one of these plans, you can pay off your debt by making monthly payments to a credit-counseling agency, which then distributes the money to your creditors, such as credit card companies, according to the National Foundation for Credit Counseling.
Participating in a debt management plan can lead to reduced or waived finance charges and fees for your credit card bills and other debt, the foundation says. It usually takes about three to four years to complete one of these plans.
“Debt management programs serve the dual role of helping you repay your debts while creditors receive the money owed to them,” the foundation says.
If you’re going to start a debt management plan, be sure to pick a nonprofit credit-counseling agency with a long track record, a solid rating with the Better Business Bureau and good reviews from customers, according to Howard Dvorkin, chairman of personal finance website Debt.com.