Managing Debt

What’s the Worst Kind of Holiday Debt?

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Right around now, you’re getting or paying the bills you racked up during the holiday season. Maybe you didn’t realize you pushed your balances so high, or perhaps the expenses seem manageable. Either way, do you know how bad your debt really is?

Debts carry different burdens, depending on the type and repayment structure. If your holiday debt falls into one of these categories, it’s in your best interest to quickly make a plan for reducing it and saving yourself money in the long run.

High-Interest Debt

Debt with high interest rates can be a blow to your finances long after the New Year celebrations end. If you took out a cash advance or a payday loan to buy holiday gifts, make repaying that debt your first priority. Those types of credit come with high interest rates and fees galore, so repaying it needs to be a non-negotiable part of your budget.

Take a look at the credit cards you used while shopping — if you’re not able to pay those bills in full this month, tackle the cards that carry the highest interest rates. Rewards and store credit cards tend to have higher interest rates than other credit cards.

If you’re looking at a gargantuan bill, consider transferring the balance to a lower-interest credit card, but only do so if it will save you in the long run. Opening a new card results in an inquiry on your credit report (a small, temporary ding to your credit score), and you’ll have to pay a fee for the transfer.

Credit Score-Killing Debt

The way you use your debt has a huge impact on your credit scores. After payment history, debt usage has the greatest impact on your scores, so you want to use as little of your available credit as possible.

Check your credit limits and balances — are you close to hitting the limit? If you’re using more than 30% of your available revolving credit because of holiday spending, get that utilization rate down, pronto. You can see how high balances impact your credit scores using free tools like Credit.com’s Credit Report Card, which will show you what factors are pulling your scores down. Low credit scores can make it difficult to access other forms of credit at good interest rates, so a good credit score is a long-term money-saving advantage.

Debt You Can’t Pay

Any debt is bad if you can’t pay it. It’s the end-all-be-all credit score killer, because payment history accounts for 35% of your credit scores. Even if you can’t pay much of your credit card bill following holiday shopping sprees, make sure you pay what you can on time. Delinquency not only looks bad on its own, but it could get you tangled up with debt collectors, which no one wants.

If you’re struggling to meet your monthly bills, reach out the lender to see if you can modify your payment structure. Whatever you do, don’t toss the bills in with the holiday decorations to collect dust until it’s too late.

More on Credit Reports and Credit Scores:

Image: Ruslan Ivantsov

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