Financial Diet to Trim Your Holiday Waste

Did your holiday spending break the bank? Personal finance contributor Michelle Singletary suggests transferring credit card balances and prioritizing bills to get out of holiday debt as soon as possible.

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MADELEINE BRAND, host:

From NPR News, this is DAY TO DAY.

Many of us woke up this morning to ripped wrapping paper and boxes everywhere and perhaps, a feeling of holiday excess.

Joining us to talk about how to cope with the credit card debt we may now have is Michelle Singletary. She's our regular host on matters of personal finance.

Hi, Michelle.

MICHELLE SINGLETARY: Hi.

BRAND: Well, what is the first thing people should do when they realize, gosh, I may have spent too much on this holiday?

SINGLETARY: Don't bury your head in the sand or the snow, or wherever you are living, in the dirt. I mean it's amazing how many people won't look at all the bills. They know they overspent. So you have to assess the damage. Get all the bills, lay them out, write them down, who you owe, and begin there.

BRAND: And begin there, and let's say you've got more than one credit card debt. You've got multiple, multiple credit cards all with payments looming. Which one should you pay off first?

SINGLETARY: Now, you know, intuitively, you think I should start on the credit card or the debt that has the highest interest. But if you've got multiple credit card debt or multiple bills, start with the one that has the lowest balance because psychologically, it will help you. It will give you a boost to pay off that first.

Now, mind you, all the time you're going to be paying on that higher interest rate debt because you don't want to get behind on that.

But it just gives you a feeling of accomplishment because lots of folks are paying on this debt. They never feel as if they're getting rid of any of it. So if you get rid of the lower debt, it will give you this push to continue.

BRAND: What about another way to outfox those high interest rates? And that would be actually transferring balances to a credit card that is offering a lower interest rate.

SINGLETARY: That's a good strategy. There are a couple of things you need to be aware of. Let's say you've got, you know, all these credit cards and you've got an offer in the mail for zero interest for six months, and you say, oh, that's a great idea, let me pile all of this on the one card. That can be an effective way to get a handle on that debt. But it could lower your credit score because now, you could be up to the maximum limit on that new card.

But if you're not going to get any new credit anytime soon, don't worry about the hit to your credit score. Take advantage of that, but recognize it oftentimes. After that introductory offer, the rate could go up. So if it's six months or a year, try as best you can to get rid of all that debt in that time period.

BRAND: What about taking out a loan to consolidate all that debt and pay it off in one fell swoop?

SINGLETARY: I am very cautious about of recommending this for people, especially if you're going to be using your home because what happens is people will get a home equity line of credit or refinance their home, payoff the credit card debt and then run it back up again.

Now, what you've done is taken an unsecured debt and made it secured. You have put your house on the line. Now, I'm not advocating this, but say you don't or can't pay your credit card bill. They're not going to put you on the street. But if you can't pay that mortgage that now has that debt into it, you will be put on the street.

BRAND: Michelle, thank you.

SINGLETARY: You're welcome.

BRAND: That's Michelle Singletary. She writes the syndicated column “The Color of Money,” and she's DAY TO DAY's regular guest for personal finance discussions.

And if you have money questions for Michelle, please send them to us. Just go to our Web site NPR.org, click on the Contact Us link, that's found at the top of every page. Be sure to include Michelle in your subject line.

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