Visitors enjoy shopping at Mall of the Emirates in Dubai. Picture for illustrative purpose only. Image Credit: Clint Egbert/Gulf News

Dubai: Debt over the holidays is easy to rack up but paying it off in instalments can wreak havoc on your budget for years. Once the shopping bills start pouring in and the monthly payments start siphoning your income, it could easily snowball into liabilities you could not pay as easily.

“With the holiday season now in full swing, shoppers are evidently rushing to buy the perfect gifts. If history is any guide, however, many are also spending beyond their means,” said Dr Khalid Essaye, an Abu Dhabi-based researcher specialising in retail and credit spending.

During last year’s gift giving season, about a third of all shoppers took on debt to pay for holiday gifts, travel, and entertainment, according to multiple surveys conducted worldwide. Furthermore, more than one third said their debt would take at least five months to pay off.

“Accumulating holiday debts can especially be costly in a high interest rate environment when credit card borrowers who carry a balance face higher fee, making it harder to dig out of debt,” cautioned Dubai-based wealth advisor Mohammad Shaan.

If you're in debt from the recent holidays and want to pay it off, Shaan and Essaye both agreed that you consider consolidating and creating a plan to get out of debt once and for all. Here's how to do it:

Tally how much you owe in all, consolidate the debt

“Add up all your credit card balances and other debts from the holidays to see how much you owe. Crafting a plan for debt repayment will be easier if you write down your debts along with the interest rate and the current balance,” added Shaan. Here's an example of how your list might look:

An example of how your debt might look like after holiday shopping

“Once you know how much you owe, look to consolidate balances, and pay them off. While there are a few other options to consider, the most popular products for debt consolidation include using credit cards with introductory offer of zero per cent interest rate for a period and personal loans.”

Good to use a balance transfer card to consolidate holiday debt?
This is where transferring your balances to a credit card can help, especially when holidays debts mount. It lets you secure zero per cent interest rate on balances transferred from other cards for anywhere from nine to 21 months.

Some charge a balance transfer fee that is usually equal to 3 per cent or 5 per cent of your balance upfront, but the interest savings can be worth paying the fee if you pay off your debt quickly at zero per cent interest rate.

“Because balance transfer credit cards only let you save on interest for a short amount of time, this option works best for someone who can pay off their holiday debt on an expedited timeline,” added Shaan.

When to use personal loan to settle holiday debts?

Personal loans let you consolidate debt with a low fixed interest rate, a fixed monthly payment, and a fixed repayment period. This means you'll pay interest on your consolidated debt while you pay it off, but personal loans have low rates for those with good credit.

That's much lower than you'll pay with a credit card since the average credit card with an introductory rate offer currently over 17 per cent. “Personal loans typically offer terms ranging from 12 months to 60 months, so they can be a better option for consumers who have a lot of debt and need plenty of time to pay it off,” added Essaye.

“Deciding how to consolidate your holiday debt based on your repayment plan is key. The right debt consolidation method for you depends on a few factors — how much debt you have, how much you can afford to pay each month, and how long your debt will take to pay off.

“Although a debt repayment calculator can help you determine your next best steps and which debt consolidation to go with, you can also do some basic math to figure it out on your own,” he added.

Essaye explains how to use balance transfer strategy to consolidate high holiday debts
Like in the above example, if you had Dh2,394 in holiday debt to consolidate, here's how your strategy might look with a balance transfer credit card:

For example, let's say you signed up for a card that gives zero per cent APR on purchases and balance transfers for 15 months, followed by a variable APR of 14.49 per cent to 25.49 per cent.

This card doesn't charge any balance transfer fees for balances transferred in the first 60 days, so you could make a fee-free transfer of your debts right away upon approval.

With 15 months to repay your holiday debt at zero per cent APR, you would need to pay Dh159.60 per month to become debt-free without interest within that time frame.

If you couldn't pay that much each month toward your debts, you might want to go with a personal loan that offers a low fixed rate for several years.

If you took out a personal loan that charged just 4.99 per cent APR and let you pay off your debt over 36 months, you would only need to pay Dh72 per month to become debt-free over the course of three years. During that time, you would wind up paying Dh189 in interest on your loan.

Key takeaway? Try not to prolong your holiday debt more than a year from your break

“Whatever debt consolidation option you wind up with, make sure you decide on a concrete plan and stick with it. If you don't, you won't pay off as much debt as you want and you'll prolong the financial problems debt brings into your life,” added Essaye.

“If you're worried about paying as much as you can toward your debts, it can also help to cut your spending for a while. With enough small cuts in your spending, you may be able to free up some extra cash to pay toward debt or start building a savings buffer.”

Also make sure that, while you're in debt repayment mode, you're not using credit or loans to rack up more debt, reiterated Shaan.