8 Steps to Pay Off Holiday Debt Fast and Save on Interest

2024 was a record-breaking year for holiday spending, according to the National Retail Federation. That, along with decades-high consumer debt levels and rising delinquency rates, could spell trouble for the average American struggling to pay down holiday debt. However, there are steps you can take to pay off holiday expenses faster while saving on interest.

We'll cover eight ways to get a handle on debt, pay it down, and/or refinance it, plus tips from financial experts.

1. Create a list of all your debts

The first step is to take inventory of all your holiday debt. Make a list that includes each credit card and loan you used to pay for holiday expenses. Include the outstanding balance, interest rate or APR, monthly payment amount, remaining term (for non-revolving debt), and whether interest is fixed or variable. Then, figure your total outstanding balance, average interest rate, time to pay off, and total overall cost.

2. Calculate the weighted average interest rate

When you have multiple debt amounts at different interest rates, you need to determine the weighted average interest rate to see how much that debt costs overall. You can use a credit card calculator if you have credit card debt only. Or, you can do some simple math using your phone's calculator. Here it is:

1. Add up all debts to get the total amount you owe.
2. Divide each debt by the total amount owed (from the first step) and round up to three decimal places.
3. Then, multiply each result by the interest rate or APR for that debt amount.
4. Add up the numbers from step 3 to get the weighted average interest rate.
5. Multiple by 100 to express as a percentage.

For example, say you owe the following:

1. Add all debts: $10,000 + $7,000 + $5,000 = $22,000 total debt
2. Divide each debt by the total owed:
   1. $10,000/$22,000 = 0.455
   2. $7,000/$22,000 = 0.318
   3. $5,000/$22,000 = 0.227
3. Multiply each result from step 3 by the interest rate:
   1. 0.455 x .28 = 0.127
   2. 0.318 x .30 = 0.095
   3. 0.227 x .25 = 0.057
4. Add up the numbers from step 3: 0.127 + 0.095 + 0.057 = .279
5. The weighted average interest rate = 27.9%

3. Consolidate or refinance your debt

If you can get a lower rate with a personal loan or balance transfer credit card than what you're paying now, debt consolidation or refinancing could save you a lot of money.

Personal loans provide you with a lump sum amount upfront that you can use to pay off one or more debts. You then repay the loan over a set term through fixed payments. Personal loans tend to come with lower interest rates than credit cards — 12.32% for a two-year loan compared to 21.47% — according to the Federal Reserve.

"Consider the borrower who has $5,000 borrowed across three credit cards at an average interest rate of 18% and consolidates into a personal loan at 10%. That will save hundreds in interest charges over a two-year repayment period," says Reilly Renwick, chief marketing officer at Pragmatic Mortgage.

Example

Here's an example of what that analysis would look like for a person who racked up $1,650 in holiday debt across three credit cards. We calculated the weighted average using the steps above.

Current credit card debt

Debt consolidation loan (options)

After running the numbers, it's clear that a personal loan could benefit this person. The best loan option, however, will depend on their priorities and whether they can qualify:

• Two-year personal loan: The two-year loan increases the monthly payment amount by $8, reduces the pay-off time by nine months, and offers the lowest overall cost. It's best for those who prioritize a fast pay-off and the lowest possible overall cost.
• Three-year personal loan: The three-year loan extends the pay-off time by three months while reducing the monthly payment amount and overall cost. It's best for those who prioritize a lower monthly payment and overall cost and want to keep a similar term.
• Five-year personal loan: The five-year loan offers the lowest monthly payment but doubles the overall cost and extends the payoff time by 27 months. It's best for those who need a lower monthly payment, despite a higher overall cost and longer term.

Prequalify to see if you can get a lower rate than what you're paying now, then use a personal loan calculator to see how much a debt consolidation loan will cost in total.

Use a balance transfer card

Alternatively, you might prefer a balance transfer card, which is a credit card that allows you to use the credit line to pay off other balances.

Balance transfer cards typically come with a balance transfer fee of 3% to 5% of the amount being transferred but may offer an interest-free or 0% introductory period ranging from 12 to 21 months. If you qualify for a credit limit high enough to cover one or more of your balances, you could potentially reduce your interest costs and pay down your debt faster.

However, you'll need to consider the cost of the balance transfer fee in comparison to your potential interest savings. It's also important to note that a regular interest rate will go into effect once the promotional period ends. If any outstanding balance remains at that point, it will begin accruing interest according to the card's standard rate.

4. Build a budget

Even if you're consolidating or refinancing your debt, you should still create or review your monthly budget to find where you can cut spending and to make sure you can afford monthly payments.

If you don't have a budget, build one by listing your monthly income and expenses. You'll need to include your rent or mortgage payment along with the amounts you spend on groceries, transportation, gas, childcare, healthcare, utilities, debt, and more. A budgeting template, such as this one from the Federal Trade Commission, can be helpful if you're starting from scratch.

If you already have a budget, review it to ensure all your income and expenses are accurate. If anything has changed, make updates. Once updated, subtract your expenses from your income to see how much money you have left each month.

5. Limit spending

Review your budget to see where or if you can reduce or eliminate expenses. Go line by line. For example, you may be able to reduce food waste and save money by meal planning and sticking to a shopping list. Review your subscriptions to see which you can cancel or downgrade. Once you finish, add how much you'll save and can put towards monthly debts.

6. Explore additional income streams

To pay off debt even faster and save on interest, brainstorm ways to boost your income. Doing so, even temporarily, can help. Potential paths to explore are scaling up your current work by picking up extra hours or projects. Additionally, consider picking up a side gig like becoming a delivery driver, virtual tutor, freelance writer, or pet sitter.

7. Stick to a debt payoff strategy

Once you know how much you pay toward your holiday debt each month, consider a debt payoff strategy, such as one of these popular methods. These may also be your only option if you can't qualify for a lower rate with a personal loan or balance transfer credit card.

"If an individual has poor or fair credit, they won't qualify for a loan with a rate lower than what their current credit card rates are, and another method may work better, such as credit counseling or the snowball method," Renwick says.

Debt snowball method

The debt snowball method involves paying off debts from smallest to largest, regardless of their interest rates. You still make the minimum required monthly payments on all of your debts, but you put all the extra money toward your debt account with the smallest loan balance.

"Each time you get a bill paid off, you can add the minimum payment from the paid-off accounts to the extra funds you allocated for debt payoff, and it creates a snowball effect that pays off some accounts faster," says Thomas Racca, manager of personal finance management at the Navy Federal Credit Union.

The snowball method isn't the cheapest way to pay off multiple debts, because you're prioritizing the debt with the smallest balance over the one with the highest interest rate. But it offers the fastest path to paying off a balance in full which can be encouraging.

"This method is better for staying motivated, as it delivers faster, tangible results," says Racca.

Debt avalanche method

The debt avalanche method involves paying off debts with the highest interest rates first, regardless of your loan balances. Similar to the snowball method, you make all your minimum required payments. However, instead of putting all your extra debt money toward the smallest balance, you put it toward the debt with the highest interest rate.

"This method is better for actually saving money," says Racca. However, it may not offer the quick wins you can get with the snowball method.

Debt snowflake method

A single snowflake may go unnoticed, but many together can create a blanket of snow. The debt snowflake method works on the same principle, recommending that you make as many small payments as you can, whenever you can. These small contributions can add up over time, helping you chip away at your balance faster.

To implement this method, you still make all of your minimum monthly debt payments but then make extra payments whenever opportunities arise. For example, if you sell an old chair for $100, get $50 for your birthday, and get $20 in rewards from your credit card, you'd use them all to pay down your debt.

As for which debts you prioritize, it's up to you. You can spread the payments across multiple debts or target one at a time using the snowball or avalanche method.

8. Seek help from a credit counselor

If you'd like some guidance and support along the way, consider enlisting the help of a credit counselor. Credit counselors have specialized training around debt, credit, and money management, so can help you formulate a holiday debt payoff plan and see it through. You can find a list of non-profit counseling agencies in your area using the National Foundation for Credit Counseling's agency finder tool.

Read More:

• 11 Ways To Pay Off Debt
• Too Much Credit Card Debt? Here’s How To Pay It Off
• Unemployed With Credit Card Debt? 6 Ways To Handle It
• How To Consolidate Bills Into One Payment
• How Does Debt Consolidation Work?
• How Debt Consolidation Helps Your Credit
• Best Debt Consolidation Loans for Fair Credit