With the holiday season drawing to a close, some Americans are going to find themselves nursing a pretty serious debt hangover.
In our second annual holiday debt survey, MagnifyMoney found consumers who took on debt this holiday season will kick off the New Year with an average of $1,003 worth of new debt. That is up from $986 in 2015, for a year-over-year increase of 1.7%.
Our survey consisted of a national sample of 552 Americans who reported they added debt during the holidays.
Here are key findings:
Most people who went into debt didn’t plan on it
Racking up credit card debt isn’t exactly a problem in and of itself, so long as you have the cash on hand to pay it off quickly. But in our survey, we found the vast majority — 65.2% — of consumers who took on debt did so unexpectedly this year, and didn’t budget for the extra expenses.
It’s easy to imagine scenarios in which people might spend more than they can afford over the holidays. Last-minute gifts, family emergencies, and, for some, fewer work hours, can all add up to a hefty credit card bill if not planned for in advance.
Most people will be paying off their debt for 4 months or more
Less than one-quarter of those surveyed said they can pay off their debt within one month. Nearly half (46%) predict they’ll need four months or more to pay off their holiday debt, or will only make the minimum monthly payments.
Nearly 12% of respondents said they only plan on making minimum monthly payments, which can extend repayment for years.
Even a seemingly meager amount of debt can quickly balloon over time if it isn’t paid off aggressively. We can illustrate this using the MagnifyMoney Credit Card Payoff Calculator.
A person carrying an average debt load of $1,003 who makes one $25 minimum payment per month would need 58 months (4.8 years) to pay off their debt. That calculation assumes an average APR of 16%.
On top of paying off their principal balance of $1,003, over that time they would pay an additional $442 worth of interest for a grand total of $1,445.
Credit cards were the most common form of debt
For another year, credit cards reign as the most popular source of holiday debt. In fact, even more consumers reported using credit cards for holiday debt this year than in 2015 — 59.9% vs. 52%.
Unfortunately, the number of consumers who turned to payday loans this year increased, from 6% in 2015 to 7.1% in 2016. Payday and title loans are hands down the most costly options for people who find themselves in need of cash.
We did find one bright spot, however. This year, the rate of consumers who said they used store credit cards fell dramatically, from 30% in 2015 to 17.1% in 2016. Store credit cards can often come with painfully high interest rates and other gotchas like dreaded deferred interest policies.
Shoppers are stuck with higher rates this year
This year, half of survey respondents (50%) said their debt carries an APR of 10% and above. Among those, 34.7% have APRs between 10-19% and 16% carry APRs above 20%.
The rate of people who are stuck with 20% or higher APRs rose significantly year over year, from 9% in 2015 to 16% this year.
But most people won’t bother to get a lower rate
Despite the fact that almost half of respondents expect to take 4 months or more to pay off their debt, a mere 13% of respondents said they plan to shop around to find a better rate with a different bank or loan. That’s even worse than last year, when 22% of respondents said they would shop around for a better rate.
The most cited reason for not wanting to shop around is not wanting to deal with another bank, noted by 20.9% of respondents this year.
Using the MagnifyMoney credit card payoff calculator, we found a consumer with $1,003 in debt at a 16% rate making minimum payments would shave over a year off debt repayment and save over $400 in interest payments by finding a 0% balance transfer.
Millennials were most likely to go into debt over the holidays
Among all age groups, people ages 24-35 were most likely to say they went into debt this holiday season with a rate of 14.3%. With the exception of 45-54-year-olds, the likelihood of going into debt decreased with age. Seniors were least likely to say they went into debt, with a rate of 7.6%.
How to free yourself from holiday debt:
In preparation for the new year, MagnifyMoney released the 2nd edition of its free 45 page Debt Free Forever eBook – that you can download to prepare your action plan, tailored to whether your situation calls for a quick switch to a lower rate, or more significant debt payoff advice.
Key tips for beating the debt cycle include:
- Understand where your money actually went. The best way to fix your spending problem is to understand where the money has actually gone. And there are great apps, like LevelMoney or Mint, which can help you understand where your money has gone over the last 3 months. We particularly like LevelMoney, because it splits your expenditure into fixed, recurring expenses and variable expenses.
- Review your credit report from all three reporting agencies. You need to know what is on your credit report in order to build a good credit score. You can download your report for free at AnnualCreditReport.com for all three bureaus.
- Understand your credit score and put together a plan to improve your score during 2017. People with the best scores never charge more than 10% of their available credit and pay their bills on time every month. Not only is that good for your score, but it is good for your wallet. And you can now get your official FICO score for free in a number of places. Otherwise, you can get your VantageScore at sites like CreditKarma.
- If you have a good credit score, your debt can probably be refinanced. Mortgages, student loans, auto loans and credit cards (with a balance transfer or personal loan) can all be refinanced. Find ways to lock in much lower interest rates now before rates go up to help you pay off your debt faster. But avoid extending the term to get a lower payment. The biggest trap people fall into with refinancing is that they lower their rate and extend their term, like taking a 30 year refinance on a mortgage that’s set to be paid off in 15 years. By doing this, you might end up paying more money in the long run. Second, be careful before you refinance federal student loans, because you give up valuable protection.
- Paying off the debt with the highest interest rate first will save you the most money (the debt ‘avalanche’ method), but a recent study shows you’re more likely to stick to paying off your debt if you pay the debt with the smallest balance in full first (the debt ‘snowball’ method), even if it doesn’t have the highest interest rate. That’s because small ‘wins’ help build momentum to keep you motivated.
- Automate all of your payments. Data has consistently shown that automating decisions greatly increases the likelihood of achieving your goals. To build that emergency fund, set up automatic transfers from your checking to your savings account. (Even better, get a higher interest rate online account and keep it completely separate from your checking account). To build your retirement savings, automate your 401(k) or IRA contributions. And to pay your credit card bill, automate your monthly payments.
- ‘Net worth’ is not just a concept for the rich, and you need to focus on your net worth now. Net worth is a simple concept: it is what you own minus what you owe. Building wealth and being financially responsible means you are building your net worth. A good salary doesn’t help your net worth if you’re spending it all on your car and clothes and not saving each year. Focus on the right number: building your net worth.
Before you consider a balance transfer:
If you need to buy yourself more time while you trim expenses and work on paying down your debt, a balance transfer can be a useful tool, but one that can backfire if you’re not disciplined. A balance transfer is simply a process where you transfer the balance from one or more credit cards onto a single new credit card with a different rate.
You can use our balance transfer calculator to estimate whether getting a balance transfer credit card will help you save money and pay off your debt faster.
If it will help, you’ll first need to check your credit score to see where you stand since you’ll be applying for another credit card. Balance transfer offers typically require a credit score of 680 or higher to be approved.
You can check your FICO score for free using Discover’s free FICO Score Card which is even available to non-customers who don’t use Discover products, or use another free source.
It’s also important to do the math before signing up for a new credit card. Be honest about how much you can afford to pay each month to determine how much a balance transfer will save you in the long run.
And keep these tips in mind:
- Many balance transfer offers have fees of 3% or more. While that can be worth it for large balances, make sure you compare the fee versus what you will save in interest and when you think you’ll pay off the debt.
- On most cards, balance transfer offers are only valid if you complete the transfer within the first 60 days.
- One month before your rate expires, look for another offer because when the 0% period expires, the interest rate will rise significantly.
- Don’t spend on the new card. Unless the 0% offer extends to purchases, you will be charged interest on your spending and rack up more debt.
2016 Post-Holiday Debt Survey Questions
Methodology: MagnifyMoney surveyed 552 U.S. adults who reported they added debt over the holidays via Google Consumer Surveys from December 26 – 27.
Average Debt Among Shoppers Who Said They Went into Debt Over the Holidays
Did you go into debt this holiday season?
Age 25-34: 14.3%
Age 35-44: 10.9%
Age 45-54: 12.5%
Age 55-64: 8.5%
Age 65+: 7.6%
If you went into debt, did you plan to go into debt this holiday season?
How much debt did you take on over the holidays?
Where did your holiday debt come from?
Credit cards: 59.9%
Store cards: 17.1%
Personal loan: 8.9%
Payday / title loan: 7.1%
Home equity loan: 5.3%
When will you pay the debt off?
I’m only making minimum payments: 11.8%
1 month: 23.9%
2 months: 13.8%
3 months: 16.2%
4 months: 7.4%
5 months+: 27.0%
Will you try to consolidate your debt or shop around for a good balance transfer rate?
No – Don’t want to deal with another bank: 20.9%
No – Too many traps: 16.0%
No – Rate is already low: 26.3%
No: – Don’t know enough about it: 11.0%
No – Wouldn’t qualify: 12.6%
How stressed are you about your holiday debt?
Not Stressed: 70.3%
What interest rate are you paying on your debt?
Less than 9%: 41.7%