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6 ways NOT to pay off holiday credit card debt

By Dawn Papandrea
Published: January 05, 2018

Dawn Papandrea
Personal Finance Writer
Specializes in family finances

6 ways NOT to pay off holiday credit card debt

If you're dreading your post-holiday credit card bills, join the crowd. 

Holiday retail sales in 2017 increased 4.9 percent, according to a Mastercard SpendingPulse survey. Online shopping surged 18.1 percent compared to 2016. A good chunk of all of that holiday spending was on credit cards, and the bills are coming due.

If you aim to make good on a resolution to pay down your debt, make sure you do so in a way that actually improves your overall financial status. In other words, avoid resorting to these six debt payoff plans. 

1. Don't dip into retirement savings.

There are two ways people tap retirement funds that don't serve their long-term interests, says Kelley Long, a financial planner and spokeswoman for 360 Degrees of Financial Literacy.

"The first way is through a 401(k) loan," she says. "Not only are you sacrificing growth in your retirement funds while you pay off the loan, but if you leave your job before the loan is paid back, you'll owe the entire balance immediately – and you can't pay it back with a credit card."

The other unwise decision is to withdraw from your individual retirement account. The 10 percent early withdrawal penalty alone can end up costing more than any credit card interest.

Better move: Take money out of savings.
Interest rates on savings accounts and short-term investments are still low, so "borrowing" from yourself and replenishing the account over time can help repair the damage if you realize you overspent during the holidays, says Kasey C. Gahler, a Texas-based certified financial planner.

"Just don't bring your savings down to zero," he warns, since you should try to keep a healthy emergency fund intact. He recommends socking away three to six months' worth of living expenses – or even more if you're working in a field with high layoff potential – so you don't go deeper into debt because of unexpected bills or loss of income.

2. Don't use a home equity line of credit.

Low interest rates can make borrowing against your house via a home equity line of credit seem attractive – especially since the loan interest is usually tax deductible. But using this tactic can be tricky.

"You're paying for debt with different debt," says Gahler. "The issue is not necessarily what the interest rate is, but that you're playing a shell game."

Better move: Increase your earnings.
Instead of moving your debt around, make a concerted effort to pay it off faster.

"If you are retired or have availability in your work schedule, you can pick up a seasonal position to make extra money for holiday spending/paying off holiday debt," says Jake Serfas, lead financial strategist at O’Dell, Winkfield, Roseman and Shipp in Washington, D.C. Or you can hold a garage sale, or sell items on eBay or Craigslist.

"You want to have a laser focus on the highest interest rate card debt first. Once that is paid off, go to the next highest rate."

3. Don't take out a payday loan.

Payday loans are essentially very high-interest loans that provide an advance on your paycheck, so be sure to read the fine print, says Long.

"These loans come with big fees, and you'll end up paying more in the long run than if you just waited until you're paid to pay off the credit card," she adds.

Better move: Make adjustments to your paycheck.
There are ways to alter how much income tax you pay on a short-term basis.

"Why pay more throughout the year and get a refund?" asks John Hill, owner of Gateway Retirement in Rock Hill, South Carolina. "Your No. 1 obligation is to pay yourself, while paying as little tax as possible."

Ask your human resources staff if you can increase your take-home pay by increasing your allowances, and put that extra money toward your debt (and check with your accountant if you're not sure about it). Once the debt is repaid, you can revert back to where you had it.

In a similar vein, if you expect a tax refund, you could file your return early to get that money to help accelerate your payoff plan.

4. Don't pay off your cards without a plan.

If you owe a balance on more than one account, choosing an amount each month and divvying it up equally among accounts is not advisable, says Gahler. The same goes for paying just the minimum amount due on your accounts.

"It will be hard to get out of debt for the long term that way," he says.

Better move: Focus on the highest interest rate card first.
"You want to have a laser focus on the highest interest rate card debt first. Once that is paid off, go to the next highest rate," says Gahler.

The idea is that you want to rid yourself of the debt that's costing you the most as soon as possible. Just be sure to maintain on-time minimum payments on your other accounts. Of course, if you have a small balance that's easy to pay off, go for it, so you can enjoy the satisfaction of crossing that one account off your list, says Gahler.

5. Don't use balance transfers without a debt payoff plan.

Using balance transfers can be an efficient way to pay off a debt using a lower interest or zero interest rate card. Or, it could be just a temporary attempt to sweep the problem under the rug, warns Serfas. The danger lies in the limited promotional period. People often end up using the new card for additional spending without paying off the original balance before the introductory period expires or start using the card again that now has a zero balance.

"Not only do they transfer the old balance, but they accrue even more," says Long. And don't forget: With every new account you open, your credit score will take a temporary hit.

Better move: Use balance transfers sparingly, and crunch the numbers first.
You may receive a low promotional interest rate on a new balance transfer card, but don't forget that you'll also usually pay a balance transfer fee, which is typically 3 to 5 percent of the amount you transfer. Run the numbers on a balance transfer calculator to see if a balance transfer is worth it. If it makes financial sense to go this route, stay disciplined with your monthly payments, and circle your "Debt Free Date" on the calendar to stay motivated.

6. Don't borrow from family.

Seeking financial help from relatives may be preferable to turning to other lenders, but there are still caveats.

"Borrowing money from friends and family can put distance between relationships," says Hill. "When no terms are set, there is tension and often questions that need to be answered."

Better move: Start thinking about the next holiday season in January.
"Take a couple of minutes to go through what you spent this past holiday season, and tally it up. Then divide that total by the remaining months of the year, and try to build it into your budget to put that amount away each month," says Gahler.

By December, you'll have a nice amount set aside for cash-only holiday spending.

Ultimately, there isn't a quick fix for getting out of debt, says Hill.

"It’s much better to save all year long for holiday spending, rather than overspending and running up debt. Doing so will allow you to be paid interest, instead of paying interest," he says. And that will make for more rewarding, enjoyable, debt-free holidays moving forward.

See related: Is it possible to pay off debt too quickly?, You did WHAT to pay off your debt?, When paying off debt becomes an addiction