When holiday joy is replaced with feelings of impending doom because January credit card statements are due, it’s time to call in the experts. This week, we’ll strategize with Jill Valentini, Assistant Vice President & Retail Branch Manager. She’ll give us advice on how to cope with holiday debt and continue the new year on solid financial footing.
A new year is in full swing, and that means some hefty credit card bills are due soon. It can be overwhelming and stressful. What should we do?
Understand that dealing with holiday debt is a collective process, and the first step is to see everything in front of you on paper. A lot of people are afraid of sticker shock, and I know it can be painful, but the quicker you do it, the easier it is to make a plan. The new year is a good time to look at your debt, look at your assets, and work through a budget. That in itself is great preparation for the year.
What do you say to clients who tell you they’re so overwhelmed that they’re stuck in neutral? Do you have any tips on getting started?
Absolutely! Phone a friend. Phone a relative. Phone your banker. At Fidelity, we’re very proud of the fact that we’re financial advisors. You should have a team around you. So call your banker, an accountant, a friend, or somebody responsible who knows what you’re doing to take stock in this and help you plan.
Now we’re mentally prepared, walk us through the process.
First, gather all your monthly bills (rent, gas, utilities, cable, etc…) plus the credit card bills you may have.
Then, either on paper or online (Google an easy budget tool), sit down and list your monthly household payments in column 1.
Next, in column 2, include your minimum monthly credit card payments. Also list the total balance you owe on each credit card, and the interest rates on those cards. Include any loans in this column, too.
Then list your income in column 3.
Once you know what you have coming in, it’s addition and subtraction. Now you can figure out how to pay down the excess debt.
What are the best options to pay down excess debt?
There are lots of options. Here are three great avenues to explore:
Option I: The Home Equity Loan.
If you own a home and have collateral, it may be time to consider a home equity loan to consolidate that debt. This will give you the lowest interest rate to repay the debt, and it’s all in one shot. You’re taking debt that could be a 20-year debt, and consolidating it into 5 or 10 years. Plus, you’re not paying credit card interest rates, which can be as high as 27 or 30 percent. With a home equity loan, you might pay as little as 4 or 5 percent depending on where bank rates are with the collateral you have in your home. This option helps you wipe the debt clean, and you’ll just repay a fixed amount at a low interest rate.
Should you close your credit card accounts as you pay them off?
There are mixed reviews on that. It’s always going to be a minor credit bump when you close out available credit, so you have to take stock of your spending habits. Is this something you can control? I recommend that you cut up the card, but don’t close the account.
Some lenders may require you to close credit card accounts in order to consolidate. But if you don’t have to close those accounts, your best bet is to cut up the cards and keep those credit lines open so you’re not destroying your credit.
Option II: Paying off debt.
First, make sure you have the means to pay off your credit card debt without interfering with other goals like saving for short-term and long-term goals. Also, don’t deplete your emergency fund to pay off your cards right away. If another disaster strikes, you might have to put more money back on a credit card, starting the cycle all over again.
People usually take one of two paths to paying off their cards: The "snowball" or the "avalanche."
With the "snowball" method, you focus on paying off the debt on your low-balance cards first, while paying the minimum on the other cards. This way, you build up momentum to tackle the bigger balances on other cards. This approach typically helps people stay motivated as they pay down debt, though it means you pay more in interest over time.
The "avalanche" method requires you to focus on paying off the card with the highest interest rate first. That's the card that will end up costing you the most money in the long run. But it might be hard to stay the course with this strategy, especially if that card has the highest balance and takes a long time to pay off.
This is really a personal decision and one that depends on several circumstances.
Option III: The Unsecured Loan.
If you aren’t a homeowner and you don’t have collateral, you may want to consider a consolidation (unsecured) loan at a bank.
Your interest rate will likely be a bit higher than a home equity loan, but it’s still going to be less than the interest rate you’re paying on the credit cards. Unsecured debt loans typically come with an 11 to 15 percent interest rate, compared to credit card interest rates that can be as high as 30 percent.
Once you make a plan, how often should you revisit it?
Monthly. Typically, people sit down once a month to take stock in their finances, and pay their bills. It depends on personality and time. Once a month, I sit down and say, “Here’s where I am. Here’s where I need to be. Here’s the progress I’ve made.”
Are there any apps or online tools people can use to help prompt them along, and stay positive?
Yes. A lot of banks offer a web bill pay feature, and alerts. The web bill pay feature allows you to set up recurring payments so that once you create your budget and decide you’re going to pay $200 on a credit card, you can prompt that amount to be an automatic payment. As long as you have money in your account, it just goes.
The Fidelity Bank app has helpful alerts, too. For example, if you want to be notified every time your account balance falls below $100, you can set it to notify you with a text message or email.
Or you can set up an alert every time a payment is made. It might be encouraging to hear that little “ding” whenever you pay “x” credit card company, and you should celebrate that moment. I’m not saying you should go out and buy a new car or anything like that, but maybe that’s the day you buy coffee out instead of bringing your mug to work. Do something small as a reward because that’s an important part of the process. Celebrate those small victories, and start building healthy financial habits.
On another level, what you’re really talking about is creating a positive relationship with money.
Absolutely. They say it takes 90 days to build a habit. So, if you’re checking your finances monthly, you’re getting alerts, and you’re following your financial plan in the first three months of the year, you’re starting to build a healthy habit.
It will become easier as the year goes on, and maybe that could be your new year’s resolution – to build that healthy habit with your finances. Take stock of it. Take ownership and responsibility of what has happened, and as you move forward, it will become normal, everyday practice and it won’t seem so burdensome.
What’s the most important advice you can give to help people start the new year on the right financial footing?
One of the best people you can have in your arsenal of advisors is your banker. Bankers have tools and knowledge, and they want to build a relationship with you. They want to help you to be prepared and anticipate life needs whether you’re a college student, or getting married and planning a family, or if you’re purchasing a house, or preparing for retirement.
Any Fidelity banker would be happy to do a complementary financial review with you. A large part of that conversation will be your debt and your assets. It doesn’t have to encompass everything as far as investments and retirement planning. You can do it in portions, but I recommend checking in at least once every six months.
You don’t ever want to be in a situation where you’re saying, “Oh no, my roof just caved in and I don’t know who to call.” You should say, “I’m going to call Jill, and she’ll help me get a loan so I can take care of this.” You should have your banker on speed dial. We’re here to help.
Let’s talk! Fidelity Bank has multiple local branch offices throughout Lackawanna and Luzerne counties, and our full-service Customer Care Center is at your service 7 days a week. Call or visit your local branch office today.
Daniel J. Santaniello, President and CEO, of Fidelity Bank, publishes Financially Fit with Fidelity, your guide to financial well-being, every Thursday. If you’re interested in a financial topic we haven’t yet covered or want to subscribe to our emails, please feel free to drop us a line at blog at fddbank dot com. We would love to hear from you.