How to get on top of your Christmas debt

Australians have entered the new year staring down a combined debt balance of $2.7 billion accumulated over the festive period, new research has revealed.

In a recent survey commissioned by Finder, 8% of respondents - the equivalent of roughly 1.7 million people - admitted to having taken on debt during the recent Christmas period, with an average debt balance of $1634.

Given how much Australians spend on the likes of gifts, food and travel during December, this may come as little surprise.

In the lead up to Christmas research firm Roy Morgan, for instance, forecast that shoppers were likely to fork out just shy of $70 billion during the festive season.

One silver lining is that around a quarter of people indicated that they will be able to pay off their outstanding debt in less than a month.

For most people it will take many months or even years to pay off their debt though, increasing the likelihood of forking over greater amounts of interest, fees and potentially going into even more debt.

So how can those who have accumulated debt through a credit card, buy now pay later service or a loan during the holiday period tackle their debt? Here are some options to consider.

1. Make a plan

While it might be tempting to jump into action straight away, it's worth taking the time to sit down first and work out exactly what you owe, what it's going to cost you in fees and interest to pay it back and how long it's realistically going to take you to pay it off.

People with multiple debts may also benefit from prioritising them from most to least expensive.

For example, it may prove more cost-effective to pay down a credit card balance accruing interest at 20% p.a. first, over a personal loan with an interest rate of 8% p.a.

2. Check in on your budget

In theory, the faster you pay down the debt, the more you'll save on interest and fees.

So if possible, it may be helpful to find areas where you can reduce your spending so that you can re-allocate that money towards paying off your debt more quickly.

In order to do this you may need to take a look at your budget to see where you can afford to cut back, or if you don't have one already, it could be a good time to set a budget up.

3. Consider a balance transfer

While some credit card holders may prefer paying down their debt each month on their existing card, another possibility is transferring that debt to a new card by way of a balance transfer.

"Balance transfer cards can be fantastic at this time of year because they allow you to transfer debt on your current card - which could have an interest rate over 20% - to a card where you're paying 0% interest for a fixed period of time," explains Sarah Megginson, personal finance expert at Finder.

There are a few catches though. Most cards charge a fee on the balance being transferred (usually 1% of the total), the zero-interest period only applies for a limited time (e.g. for 12 months) and any spending made on the new card is likely to incur interest.

Given this, Megginson suggests that balance transfers can be useful for those who are solely focused on paying off their debt during the zero-interest period, but not for anyone who wants to spend money on the new card.

4. Weigh up debt consolidation

For people juggling multiple debts at once with different interest rates, fees and payback periods, one option to consider in order to simplify the situation and - ideally - to pay less, is to consolidate everything by rolling multiple debts into one.

For example, say you have two credit cards with outstanding balances of $2000 and $3000 and interest rates of 18% p.a. and 20% p.a. respectively.

One option then, in theory, would be to take out a personal loan, with a 12% interest rate attached, and then use it to pay off both credit cards.

That way you'd wipe out the credit card balances which are accruing interest at a higher rate, leaving you with a single $5000 personal loan debt to pay off at a lower interest rate.

5. Don't ignore BNPL debt

Most of the major buy now pay later (BNPL) services don't charge customers interest on their debt. Instead, many tend to charge fees when payments are late.

As Megginson explains, while these fees may seem small on their own they can be relatively large compared to the debt owed, plus they can easily pile up when multiple BNPL services are involved.

"The problem is if you have multiple buy now pay later debts going at the same time and you're missing repayments on three, four or five of them at once.

"That's when those fees can suddenly start to become a much more significant amount of money."

6. Avoid taking on new debt

It goes without saying that if you're in the process of trying to pay off some post-Christmas debt, the last thing you'll want to do is make the situation harder by taking on even more debt.

"Whatever debt you're in, whether it's a credit card or buy now pay later, there's two parts to it. One is managing that debt or paying it off. The other is not racking up new debts," Megginson says.

"So sometimes the best strategy is to just try and cancel any unnecessary accounts and avoid the temptation altogether."

7. Reach out for help

If you're struggling to pay your debt then it's worth getting in contact with your bank or lender as soon as possible to let them know.

Banks and even many buy now pay later players have obligations to customers experiencing financial hardship, so it's certainly worth reaching out to the financial hardship team for assistance.

Beyond that, there are free financial counselling services available to Australians looking for additional support.

One of those is the National Debt Helpline, which people can contact by making a free call to 1800 007 007 or by using the live chat service via their website.

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