Relief for painful holiday debt ‘hangover’

The Bakersfield Californian
January 21, 2011

Talk about “hung over.” But I am not talking about the after effects of too much booze and too much partying. I’m talking about too much spending; too much flexing the credit card plastic over the holidays.

I have been working with a man we’ll call Joe for the past several months. We first met when he enrolled in a “preparing for retirement” course I taught. Somewhere in his mid 50s, it dawned on Joe that he was spending too much and saving too little. By the time he reached retirement age — at Joe’s savings rate, that would be around 100 years old — he would still not have enough money to stop working.

Joe is a college graduate. He has worked for the same local company for 20 years. He earns a good living that supports a wife and two college-bound kids. But he likes to spend — on a big house, boat, dinners out, nice vacations, etc. You get the picture.

But the reality of his age rubbing against his bills finally caught Joe’s attention, leading him to my office, where he pledged to cut his spending and bring discipline to his family’s budget.

All seemed good, until the holidays hit and Joe made his financial hole deeper and his road to retirement rougher. Like millions of other Americans, Joe spent too much in December and is facing a mountain of bills in January.

What can I do? The question was written all over his face as he and his “holiday debt hangover” paid me a visit, just two weeks after the fizz had gone flat on his New Year’s Eve champagne.

The first priority was to address Joe’s debt, while still moving him forward on his retirement planning. Becoming debt-free provides the most secure retirement.

Develop a budget:
Before you can save money, you need to know how you are spending it. I told Joe to sit down with his wife and children. Itemize expenses. Discuss ways to cut costs. For example, Joe’s family pays monthly bills for both land-line telephone service and cell phones. But the land-line is seldom used. Disconnect the land-line. Joe and his wife seldom used their cell phones to access the Internet. Drop Internet service. These two moves saved about $100 a month.

Brace yourself:
Gather all of your credit card statements. Add them up. How big was your plastic “meltdown?” How deep is your credit card debt hole?

Stop using your credit cards:
Before Joe’s financial problems can get better, he must stop making it worse. I told him to quit using his credit cards. If he used them at all, reserve them for emergencies.

Loan consolidation:
In some cases, bringing your debt into one big loan can be beneficial. But there are risks. Often interest rates can be high on these loans. Miss one payment and your credit rating can take a huge hit. Go cautiously if you seek a loan consolidation.

Debt settlement:
Companies offer to negotiate “settlements” with creditors on the amount consumers owe. Again, be cautious. Consumers often pay high fees to these companies and receive little or no debt relief. While laws have been tightened to prevent fraud, time will tell if abuses will be curtailed.

Seek your own relief:
Ask for a rate reduction on the credit cards you use that have the highest interest rates. If you have been a long-time customer and indicate you may be switching your business to a competitor, your credit card provider may be willing to reduce your interest rate.

Pay off smallest balances first:
The temptation may be to pay off the big bill — the credit card with the biggest balance owed. But I told Joe to pay off his credit cards with the lowest balances first. Most of us like “instant gratification.” Nothing is more gratifying than seeing a debt put to rest. Then apply the payment to retire the other outstanding debts.

Tax refund:
According to the IRS, the average 2009 tax refund was more than $3,000. Apply your refund to your credit card balance.

Pay cash:
I told Joe to pay for his purchases with cash. When spending involves using physical currency, you spend less. Don’t believe just me. In 2009, The Journal of Experimental Psychology reported the findings of a scientific study that concluded using cash discourages spending, while using credit or gift cards actually encourages it. According to the study’s authors, Priya Raghubir and Joydeep Srivastava, the more transparent the payment outflow, the greater the aversion to spending, or higher the “pain of paying.”

Joe’s “holiday hangover” will not disappear instantly. But step by step, he can reduce his debt and prepare for a more financially secure retirement.