Diana Clement: Beating the holiday-debt blues

Whatever the cause of your debt, getting over it requires strategies that you can work with. Photo / 123RF

Do you have the back-to-work, in-the-red blues? The holiday spending season, which for the past two years has started earlier, on Black Friday, is an expensive time.

As a nation we spent more than $10 billion at Paymark terminals in November and December, which was up 4.1 per cent from the previous year. On an individual level that increase can be very painful. Sometimes it's the unexpected spending at Christmas that tips Kiwis into the red. Maybe they planned the holiday spending well, but their car broke down or the plumbing started leaking.

Spending isn't a problem per se. It's any resulting stress that matters. That stress can be brought on by resulting debt, or just the psychological impact of blowing the budget.

We forget sometimes that spending within your means can still hold you back. I followed a thread on Facebook this week of someone who felt he needed to buy a new $4000 TV (although other members tried to convince him that $2000 for last year's model would suffice). The consequence of buying the TV meant delaying a planned rental property investment.

The blues are magnified of course if you have a bigger debt than expected and no plan of how to pay the money back.

NZCU Auckland's Rob Collins and his staff are already seeing the fallout from the seasonal spending blowout. New and existing customers are fronting up with debt mountains they can't currently manage. Many are able to refinance card debt at 29.95 per cent down to a credit union loan at 11.95 per cent, which helps a lot.

The blues are magnified if you have a bigger debt than expected and no plan of how to pay the money back. Photo / 123RF

Collins worries even more for the people who have put their heads in the sand and aren't yet seeking help.

The first step is to do the numbers. Find out how much you owe, and don't forget to include buy now pay later. Then look for ways to lower the interest rates or penalty fees you're paying.

Whatever the cause of the back-to-work, in-the-red blues, getting over it requires strategies that you can work with. There is no one-size-fits-all solution.

If you are going to refinance or consolidate your loans, make sure you get debt counselling at the same time. This is offered free by credit unions and local budget advice centres. Local services across the country are listed at Moneytalks.co.nz.

These centres can in some cases negotiate with your creditors. They can also help you get off the hamster wheel and create new financial habits.

That can include strategies such as:

Debt avalanche
This debt-repayment strategy involves making minimum payments on all your debts each month. Then whatever money for repayments you have left is all paid into the highest-interest debt remaining. Beware that some lenders apply penalties to overpayments because they figure they're not going to make their profit if you pay the debt off early.

Debt snowballing
The debt "snowball" involves paying your smallest debts first if you have more than one loan. They may not have the highest interest, but there is something motivating about seeing the number of outstanding debts reduced. Debt snowballing isn't the most logical method to pay off debt because you'd make a bigger dent with the avalanche. The thing is that the human brain isn't necessarily logical and if this method works for you then do it. As the snowball gets bigger you'll be driven to pay off more and more.

If you're struggling, speak to someone who can help. Photo / 123RF

If you still can't make headway then make sure you negotiate with your creditors, sooner rather than later. The Credit Contracts and Consumer Finance Act (CCCFA) hardship provisions mean creditors have to consider changes if you meet certain criteria around making payments. If you do you can ask to extend the contract term to reduce payments, take a payment holiday or both.

Beware of giant pitfalls that come with paying off debt. Some people's biggest enemy is themselves, not the government, the lenders, their family or whoever they blame. It's not at all uncommon to start racking up new debt when your cards are freed up by a consolidation loan.

Also beware of hidden fees or extended repayment periods, which can make the new loan more expensive than the last.

However you choose to pay down your debt the other thing to do now, says Collins, is to ensure you're not in the same situation in a year's time. "Put a line in the sand so it doesn't happen next year," he says. "Twenty dollars a week now becomes $1000 by Christmas."

Keeping out of debt longer term does require changes in the way you operate your finances. It's not just about earning more.

Read up on how to manage your finances and consider joining groups on social media that discuss such topics. Seek out the people you know in similar situations to you who do seem to manage their money well. Ask what they do. Sometimes the answer may be simpler than you think.