Your Money : Dealing With That Holiday Credit Hangover
When the holiday bills start rolling in this January, many people will find new and ominous meaning in the expression The party’s over .
Credit card spending, bolstered by increased consumer confidence and wider acceptance of plastic at such non-traditional outlets as supermarkets and fast-food joints, posted double-digit gains this year.
While that alone would be enough to give some consumers a credit hangover, the woes of the overextended are likely to be exacerbated this year because of higher interest rates. And whereas these rate increases hit other types of consumer loans in mid-1994, the bulk of the credit card rate hikes will hit in January, 1995--just as the holiday bills come due, says Robert McKinley, publisher of CardTrak, a credit card newsletter.
That’s because credit card rates don’t adjust as quickly as rates charged on other types of consumer loans, McKinley says. Moreover, the credit card market was uncharacteristically competitive in 1994, which forced some issuers to hold the line on rates longer than they normally would.
What do you do if holiday spending puts you in a New Year’s crunch? Here are some tips.
Take a picture. The first step to handling a credit hangover is determining just how bad it is, says Becky Cutler, a credit consultant who wrote Citibank’s “Coping with a Credit Crisis.” Get out a notebook and start jotting down your expenses in three categories: Fixed expenditures, such as mortgage or rent payments, utilities and insurance; variable expenses, such as food, clothing and entertainment, and expenditures for short-term credit, including credit card debt and car payments. Compare the amount you’re paying out for necessities to your after-tax income.
Trim, don’t slash. If you’re like many people, you spend almost every dime you earn on bills and daily living expenses. Without making cuts, there’s little left to whittle down the holiday bills. But don’t be overzealous. People who vow to cut too drastically rarely follow through, Cutler says. Resolve to simply trim.
Take a look at how and where you’re spending and see how much you’d save by cutting out small, unnecessary luxuries--the $2.50 morning cappuccino; the dollar or two dropped into the office vending machines; the $5 to $10 daily lunches. Most people can save upward of $100 a month by simply skipping costly snacks and brown-bagging a few days a week, says Judy Lawrence, an Albuquerque, N.M., budget counselor and author of “The Budget Kit.” One client of Lawrence’s discovered that she was spending $60 a month on vending machine snacks alone.
Involve the family. Discuss the credit situation with spouses and children and make sure everybody knows you’re trying to cut back. There’s no need to cause alarm--just set goals and explain why you need to be frugal. Kids are often surprisingly supportive and creative, checking supermarket prices and sometimes voluntarily giving up their own luxuries, Lawrence says. And getting everyone on the same fiscal diet means no one person has to suffer alone.
Prioritize your debts. After trimming your expenditures, you ought to have a tidy sum to start paying against your debts. Many people are tempted to use the money to pay off their biggest loans. But a smarter tack is to pay off the highest-cost bills--such as those 18% or 19% credit card balances, says Ruth Susswein, executive director of Bankcard Holders of America in Salem, Va.
Put away the plastic. Another good way to cut back is to simply put the credit cards away for a few months. Cutler suggests stashing them in a safe-deposit box. That takes your cards out of reach on nights and weekends, when you’re most vulnerable to binge spending.
Stop shopping. If you have little will power, walking into a mall after Christmas is like walking into a minefield. Banners trumpet post-holiday sales from virtually every store window. Exchanging a $10 item can easily turn into a $100 spending spree, Cutler says. Don’t go if you can avoid it. If you must go, bring a friend who’ll rein you in before you spend again.
Consider debt swapping. If you have good credit and high-cost credit card debts, you may be able to refinance your loans. Many credit card companies offer single-digit “teaser” rates. And people with homes can often refinance into home equity loans. While you must always be careful to check the terms and fees, those who swap wisely can often save hundreds of dollars. If you use the savings to pay down your debts faster, you reap a double benefit.
Fess up and negotiate. If your debts are more than you can possibly handle--even after trimming the budget and refinancing some loans--call your lenders immediately. Many of them will negotiate lower interest rates or more flexible payments for consumers who are sincerely trying to repay their debts. You may also want to contact a financial professional to help you get back on track.
Kathy M. Kristof welcomes comments and suggestions for columns but regrets that she cannot respond individually to letters and phone calls. Write to Personal Finance, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053.
