myFICO: How to Recover from Holiday Overspending

The holidays represent a busy time of year when it’s easy to spend more than you planned—even if you made a budget ahead of time. A recent survey by TD Bank reveals that 69% of consumers admit they have struggled with overspending during past holiday seasons.

Yet spending more money than you can afford can be dangerous. Overspending has the potential to lead to a variety of financial and credit problems. For example, if you run up high credit card balances that you can’t afford to pay off when the bill comes due, you could wind up paying high interest charges as a result. Your FICO® Score might suffer as well due to an increase in your credit utilization ratio.

If you find yourself in a position after the holidays with more debt than you can afford to pay off right away, it’s important to take action. You can recover from holiday overspending, but you need a plan. Here are some tips on creating a plan, from myFICO.

For more loan and credit education, visit myFICO’s blog at https://www.myfico.com/credit-education/blog

Step 1: Stop Overspending

Once you start overspending, it can be difficult to stop. But it’s essential to break this bad habit so you don’t continue to fall deeper into debt. If you’re having trouble avoiding temptation, consider using a personal finance app or spreadsheet to track your spending. You could also try paying your credit card bill(s) multiple times each month to stay more informed and in control of your money.

Step 2: Consider Returning Purchases

Many retailers offer extended return policies during the holidays. If you purchased an item and are now experiencing buyer’s remorse, there’s a chance you might still be able to return it and receive a refund. Although this solution might not solve all your overspending problems, it could potentially help you make a dent in the extra debt you accumulated—especially if you can make a few returns or return a big-ticket purchase.

Step 3: Assess the Situation

The next step to recovering from holiday overspending is to take an honest look at your financial situation. Make a list of the new debts you created during the holidays that you need to pay down. You may also want to list other debts you owe—especially high-interest credit card debt that might be hurting both your finances and your FICO® Score.

Step 4: Create Space in Your Budget

Once you have a list of your debts, it’s time to update your budget. This process will involve writing down your income along with current expenses (both recurring and variable). As you write out your expenses and spending goals, look for ways to reduce spending since doing so can free up extra funds to apply toward eliminating debt. You can also consider looking for ways to increase your income, like a side hustle, and apply any extra funds you earn toward reducing your new holiday debt.

Step 5: Choose a Debt Payoff Strategy

If you can make room in your budget for extra debt elimination funds, adding in a debt payoff strategy has the potential to speed up your efforts. Two of the most popular debt payoff strategies are the debt snowball and the debt avalanche.

• The debt snowball is a payoff strategy where you list your debts from the smallest to the highest balance. You make the minimum payment on every debt (to avoid late payments and the issues they can cause). But you pay as much as you can each month toward the debt with the smallest balance. After paying off the smallest debt, you repeat the process with the debt that has the next smallest balance on your list. Repeat the process until you eventually eliminate all your debts.
  
  
  
  
• The debt avalanche is a payoff strategy where you list your debts from the highest to the lowest interest rate. Again, you make minimum payments toward each debt every month. But you pay the debt with the highest interest rate first (and as aggressively as possible). Once you eliminate the debt with the highest interest rate, move down the list to the debt with the next highest interest rate and repeat the process until you eliminate all your debts.

Both strategies above have benefits when it comes to paying down debt. But if you’re trying to figure out which debts to pay off first, consider your goals.

The debt snowball strategy, for example, has the potential to benefit your FICO® Scores if you’re able to lower your credit utilization ratios faster on credit card accounts. Meanwhile, the debt avalanche approach might save you more money in interest charges, at least initially.

Step 6: Consider Consolidation

It may take time to chip away at your holiday debt, even with a debt payoff strategy in place. In the meantime, you might face high interest rates on credit cards if you revolve outstanding balances from month to month.

If you have good FICO® Scores, you might want to consider whether consolidating your high-interest debt into a new account makes sense. Balance transfer credit cards and lower-interest personal loans have the potential to help you save money on interest charges as you work to pay off large amounts of debt. You can use myFICO’s free online calculators to see whether a credit card balance transfer or debt consolidation loan is a good fit for your situation.

About myFICO

myFICO makes it easy to understand your credit with FICO^® Scores, credit reports and alerts from all 3 bureaus. myFICO is the consumer division of FICO– get your FICO Scores from the people that make the FICO Scores. For more information, visit https://www.myfico.com/.

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