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Americans racked up $1,300 in holiday debt on average: How to get back on track in the new year

“Assess the damage by totaling all your debt.”

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Fewer Americans took on holiday debt this year, according to a new MagnifyMoney survey of more than 1,170 Americans. But with many people cash-strapped because of the pandemic, those who did take on debt borrowed more than ever.

About 3 in 10 consumers (31%) fell into the red to pay for holiday expenses this year. Those who took on debt borrowed $1,381 on average, a record high. In 2015, when the survey began, the average shopper borrowed just $986.

Many taking on debt are in a tough financial spot

Many of those consumers who went into debt have precarious financial situations due to the pandemic. Half of the people surveyed who said they had been laid off or furloughed this year took on holiday debt, as did 42% who reported their salary had been cut.

"Folks aren't just taking on debt for convenience's sake or to run up rewards," Matt Schulz, chief credit analyst at LendingTree, said in a news release. "They're doing so because they don't have any choice."

Some people also took on the kinds of debt that can be expensive and tough to pay off. While 56% said they used a credit card to finance their purchases, 27% took out a personal loan, 22% employed a store card, and 18% used a title or payday loan.

Each kind of debt has dangers: Payday and title loans, for example, can have triple-digit APRs and tight repayment periods, while store credit cards tend to have higher interest rates and lower credit limits compared to standard credit cards.

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4 ways to get on track paying down debt

Getting rid of debt is a top priority of many Americans heading into the new year, but it could be an uphill climb. Almost 90% of those MagnifyMoney surveyed said they won't be able to pay off their holiday debt within a month. And 18% said they plan on only making minimum payments on the debt.

With many people struggling in the pandemic, zeroing out holiday debt may not be your first financial priority. "If you're cash strapped, you should prioritize paying for living expenses while making minimum payments on your holiday debt," says Lou Abrams, CFP, the founder of financial start-up Fisecal.

When you're able to focus on holiday debt, here are four strategies to start turning the tide.

  • Use cash, not credit: Take a break from using your credit card on miscellaneous expenses and use cash instead. Experts say using cash can help you curtail spending, so you're not adding new debt while you pay down current balances. In fact, recent college grad Kristy Epperson told Grow that going cash-only helped her clear up $20,000 in debt in one year. "I would look at my credit card bill and not even remember some of the charges," she says. Epperson said that she felt using cash would hold her accountable.
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  • Pick a debt repayment strategy: "Assess the damage by totaling all your debt and find the new monthly payments," Abrams says. Make a list of your balances and interest rates. Then figure out which debt repayment method will work best for your situation. The snowball method focuses on eliminating the smallest balances first, while the avalanche prioritizes high-rate debt.
  • Consolidate balances: Consider using personal loans and credit card balance transfer offers to help manage debt. You may be able to get a lower interest rate or better repayment terms, and you'll have fewer monthly payments to manage, too. For example, you might owe $2,000 on one credit card with an interest rate of 16% and $3,000 on a different credit card at 20%. With a balance transfer, you could move that $5,000 onto a new card and pay 0% interest for up to 18 months. These low APR offers generally last for a year or two. 
  • Make a post-holiday budget: "Review or create a budget to know how much excess cash you'll have at the end of the month with the new debt payments," Abrams says. Start by listing out your fixed expenses like food, housing, and transportation to get a sense of where your income is going. Add on an additional line item for holiday debt and sock away any extra income you have each month toward that. "If there's a shortage of cash, you'll have to cut back on expenses and random spending to make ends meet," he says.

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