Real Talk: Holiday debt

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Death. Divorce. Job loss. Sometimes tough stuff happens. Unfortunately, these not-so-great milestones often come with a financial impact. So, what do you do if you’re getting a divorce? Or if a loved one suddenly passes away? Or if you find yourself with more debt than is comfortable? In our series, Real Talk for the Tough Stuff, we’ll tackle some of these situations head-on with the honest financial advice you need to get through and get on with life.

Next up, Real Talk for the Tough Stuff: Holiday Debt

Let’s be honest. No one wants to think about debt during the Most Wonderful Time of the Year. There are holiday parties to attend and twinkling lights to hang! Can’t managing budgets be next year's problem?

We really hate to be the bearer of bad news, but here’s the thing: the “holiday hangover” is real and it’s not just about over indulging in one too many glasses of rum and eggnog. According to the Retail Council of Canada, one in three Canadians overspends during the holiday season. That includes gifts, but also travel and entertainment. A big part of the problem is that two-thirds of Canadians head into December without a penny saved. And that often means a good portion of those presents under the tree are being charged to credit cards. Not so merry and bright, right?

So, in the spirit of making sure you’re starting January off on the right foot, let’s talk about how to tackle that holiday debt.

We spoke with Angela Dyke, Manager of Operations at EasternEdge Credit Union for some expert advice, along with Lisa, a Nova Scotian who dealt with holiday debt as a recent graduate—and managed to dig herself out of it.

For Lisa, like many of us, debt wasn’t on her mind over the holiday season—she started her shopping with the best of intentions.

“I had budgeted carefully for gifts and thought I was prepared,” she explains. “Unfortunately, I didn’t take into account the cost to travel back and forth between the East Coast and Toronto where my partner was based at the time. Add to that the expense of holiday parties with friends, food and drinks, outfits, and host gifts and all of a sudden, the holidays got expensive—fast. Worse still, it was really easy to charge everything to my credit card and even easier to avoid doing the math on just how much I was racking up.”

It’s by no means an uncommon scenario—it’s easy to get caught up in all of the holiday madness. And even though the holidays only come around every year, according to Angela, many Atlantic Canadians still fall into the overspending trap.

“So often we stay focused on our day-to-day expenses and we don’t look ahead,” she says. “When that happens, the holidays can sneak up on you and you end up without the savings you need. That’s where credit cards come in. People often think they’ll have no problem paying off the charges in the new year or they hope for a holiday bonus—but you can’t rely on that. When you overspend in December, you can spend months in the new year trying to get caught up.”

The problem with relying on credit cards and charging more than you can comfortably pay back is that the interest adds up in a big way over time—making it even tougher to get back on track.

“For most credit cards, you’re paying close to 20 per cent interest,” notes Angela. “If you’re only able to manage the minimum payments, you end up carrying that balance for a long period of time—and the interest can be crushing. Let’s say you have $10,000 in credit card debt. If you’re paying 2.25 per cent of the balance, it will take you 10 years to pay off, with nearly $18,000 in interest. That’s almost double of what you charged in the first place!”

And while most of us (hopefully!) won’t be charging 10k over the holidays, it’s worth noting that half of Canadians are already carrying a balance on their credit card each month. Adding more on top of that is never a good idea—but the reality is, it’s hard to avoid the extra spending over the holidays. Recognizing that there are always going to be holiday expenses, Angela explains that the key is to be smart about how you spend.

“Ideally we should all be tucking money away each month in anticipation of the holidays,” she says. “If life gets in the way and that doesn’t happen, the next best thing you can do for yourself is to set a budget and create a plan for your shopping. Taking out cash can be helpful so you don’t lose track of what you have to spend for each gift.”

But what if your plan fails (hey, it happens) and you still blow your holiday budget? If you find yourself with more debt than expected come January, Angela says that it’s better to deal with the problem sooner rather than later.

“People sometimes feel embarrassed and don’t want to face how much they’ve overspent—but your financial institution is there to help. A financial expert can come up with a plan that helps you tackle the debt without paying a fortune in interest.”

For Lisa, her January credit card statement was a reality check. With a balance of around $2,000, she realized it was more than she could pay down right away.

“I think the holidays made for an easy excuse to over-indulge when it came to my spending and I found myself saying that my purchases were really one-time expenses that I could just pay off in January,” she recalls. “Meanwhile, I really didn’t take the time to do the math on just how much the things I was putting on credit were adding up. It was a big wake-up call.”

Her strategy was all about facing the problem head-on.

“Having to tighten my budget for several months wasn’t very much fun. I started by hiding my credit card in a dresser drawer. This forced me not to use it, which meant I wasn’t adding to the outstanding balance. Next, I took a really hard look at what was coming in and what was going out and cut back on my discretionary spending. This meant cooking my meals at home and bringing my lunches to work and finding alternative ways to socialize that didn’t involve huge expenses. I took the money I was saving and put it toward my outstanding balance, in addition to making my regular payments. This meant I could pay off my balance quickly!”

If you’re heading into the holidays without the extra cash squirreled away, there’s no need to panic. Just make a plan, craft a budget, and remember, it’s not about how much you spend, but the thought behind it. And if all else fails and you find yourself facing the holiday hangover come January? We’re here to help.