Scott Terrio is an insolvency estate manager and debt advisor in Toronto. Follow him on Twitter at @BeDebtSavvy.
It’s January, otherwise known as the month of holiday-spending regret. You know the feeling. Despite making a deal with your family—again—to stick to a scaled-down, old-fashioned Yuletide, you couldn’t resist. There were just too many Star Wars things!
You’re not alone.
The average Canadian adult spent an estimated $1,500 on Christmas in 2017. About 41 per cent of that was slated for gifts, with the rest going to holiday travel and entertainment, according to a report from PWC Canada. Other studies tell us that two-thirds of Canadians do not save a penny in preparation for their Christmas spending. So how did they do it? You guessed it: credit.
Canadian households were already stretched before the holidays, with the pace of debt growth far outstripping wages over the last decade or so. And every holiday season many reach their debt limit. Licensed insolvency trustees typically see a big uptick in filings around the fourth week of January. That coincides with credit card bills rolling in to Canadian households. Call it the Great Christmas Reckoning. Having worked with around 4,000 clients over close to a decade, I have assembled an approach to getting excess holiday spending under control.
READ: Congrats, Canadians: You’re world leaders in debt
So, if you overspent at Christmas, what can you do about it? Let’s talk holiday debt repair.
Step 1: Assess the damage
Put a figure on it. You know what you bought in terms of gifts. And just to have it hit home even further, add another 20 per cent on top of the cost of gifts for various Christmas-related things like extra eating out at the mall, extra food purchases, postage, shipping, gas, and a dozen or solow-soy extra-hot peppermint mocha light whip lattes—at $5 or 6 bucks each.
Once you have a dollar figure in mind, you can act. It’s the old adage: “If you can measure it, you can manage it.” Own the problem. It’s time to face up.
Step 2: Put your credit cards away
You need to stop the bleeding. Credit cards are tough to use if you don’t have them at hand. If you plan to keep them, at least put them in a locked place or give them to someone you trust to keep (a financial advisor or a family member). You’ll be amazed how little you miss them when you do this for a period of time. No more retail therapy, no more temptations. Repairing your holiday debt will not work if you keep adding to the problem. A better idea is to destroy and cancel them altogether. Or at least all but one emergency card. Another option is to get rid of all unsecured cards (regular credit cards) and get a single secured credit card to use. You’ll need a modest security deposit, but that builds in discipline and a small limit. Your credit score will also improve by paying down the balance in full every month.
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Step 3: Make an austerity plan
Nothing good ever came without some pain. You need a good two months of a personal austerity program to reign in this little beast. Only the essentials for 60 days. Watch Netflix or read a good book or play with your kids. This period will also serve to help you avoid doing this again next year. You’ll remember it. The time will fly by.
Step 4: Pay your debts first
Instead of paying bills immediately when you get each paycheque, make a point of setting aside a significant amount for your credit card with the lowest balance. This is an unorthodox approach that differs from traditional personal finance advice, which tends to focus on chipping away at credit cards with the highest interest rate. but it works because it brings with it an early sense of accomplishment. Paying a card off in full is a tangible gain that you will actually notice.
Many people also feel stressed about the number of cards they are servicing. This knocks one out of the equation earlier. Make sure your payment is significantly more than the normal minimum, otherwise you’ll be paying primarily interest. Preferably do an auto-payment from your account to your debt of choice, or even get your payroll to do it so you never even see it. Doing all this will give you momentum to tackle the bigger credit card beasts later.
READ: How Canadian homes became debt traps
Step 5: Stay out of shopping zones
I can’t emphasize this enough: seeing is temptation. Even if you’ve been good enough to put your cards away or destroy them, you will spend if you have the opportunity. So don’t put yourself in that situation. You are in repair mode—you had your fun and now you need to pay up.
The above advice will help, but only to an extent. If your debt problem was just too big to begin with—in other words, if you already had $20,000 or $30,000 in credit card debt and just added more over Christmas—then it may be time to enlist help. You may need to be more aggressive in terms of a permanent solution. You should consider calling a trustee to discuss a legal settlement known as a consumer proposal. In that situation, you’d pay off all your credit card debts over time with no interest and at reduced principle, but keep your stuff while doing so. Lots of people do this once the Christmas debt hangover sets in and they realize the scale of the problem they face.
Regardless of your situation, now is a good time to start putting aside some money for next Christmas, and avoid another post-Christmas debt hangover.
Scott Terrio is Manager, Consumer Insolvency at Hoyes Michalos & Associates Inc., Licensed Insolvency Trustees at Hoyes.com. Follow him on Twitter @ScottTerrioHMA
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