The day of reckoning is fast approaching for annual budgets and it may not be a good one for people who rely on credit cards.
Annual bills often collide with debt from holiday spending and that can make for a combustible Christmas and Not Very Happy New Year.
And credit cards are typically the fuel behind the explosion.
Consumers spent more than $600 billion during the 2013 holiday season and much of it went on their credit cards. In fact, the Federal Reserve Board said that consumer credit card debt rose $5 billion in the month of December alone.
That is a typical one-month surge for that time of year and not all that use can be attributed to Christmas gifts. Payments for things like insurance, property taxes, license renewals, club memberships and homeowner’s fees often crowd the credit card statement at the end of the year and make a mess of annual budgets.
The numbers can be so overwhelming that consumers take months to get their house (and budgets) back in order. Economists call the prolonged schedule for repaying year-end bills a “holiday hangover” and in some houses the distress can last until the summer or longer.
That’s why debt consolidation or debt management might be two areas worth exploring if you have a quiet moment during the holidays.
Debt consolidation is putting all your debts together and asking a bank or lending institution for one loan that will take care of it. The lending institution should come back with a loan that will lower your monthly payments and interest charges to a manageable level and make you responsible for one check a month to the lender instead of multiple checks to multiple outlets.
Debt consolidation loans typically spread your debt out over several years, which means you likely will end up paying more because of interest charges, but that can be offset by the peace of mind and budget control it brings. Trying to keep up with paying off several credit cards at various times during the month can be taxing on anyone’s nerves.
And what happens if an unforeseen expense comes along, like a car breaking down, or even the homeowner association fees doubling this year and you’re not able to make even the minimum payment on some of your cards?
Debt management is a little more structured form of regaining control of your finances. It starts with a phone call to a credit counseling agency that takes your financial information and decides whether you qualify for a Debt Management Plan (DMP).
The information helps the DMP company, usually a non-profit agency, work with the credit card companies and any other unsecured loans, to reduce your interest rates. It is not unusual to see credit card interest drop from 20-29 percent on a consumer’s account to 7-10 percent. That can make a profound difference in what you owe on your monthly payments.
If you choose to enroll in a DMP, it can take somewhere between 36 and 60 months to complete the program, at which time your debt is eliminated. DMP companies provide a monthly summary of your progress and some even include an online graphic that allows you to track your progress as you make the payments.
So if the excitement of the holidays or the demands of annual bill payments leave you financially woozy, look at debt consolidation or debt management plans as a possible cure for your financial holiday hangover.