The holiday season often brings unexpected windfalls like cash in your stocking or a year-end Christmas bonus. While it’s tempting to splurge, this extra money can be a golden opportunity to improve your financial health. Here are the best things to pay off with your holiday bonus, starting with the most impactful option: credit cards.

1. Credit Cards: The Most Bang for Your Buck

Credit card debt typically comes with high-interest rates, sometimes exceeding 20%. Paying down or eliminating this debt not only saves you from costly interest payments but also gives your credit score an immediate boost. Here's how it works:

• Lowering Your Credit Utilization: Credit utilization, or the percentage of your available credit you're using, is a major factor in your credit score. Ideally, this should be under 30%. Paying down your balances can improve your score within weeks.

• Example Impact: According to Experian (https://www.experian.com/blogs/ask-experian/what-is-credit-utilization-rate/), reducing your credit utilization can raise your score by 20-50 points, depending on other factors in your credit profile.

Pro Tip: Focus on paying off cards with the highest interest rates first (the “avalanche method”) or clear small balances for a quick win (the “snowball method”).

2. Personal Loans or Payday Loans

If you have high-interest personal loans or payday loans, prioritizing these debts can save you hundreds in interest. Payday loans, in particular, often carry annual percentage rates (APRs) of 300% or more, making them a financial drain.

• Why It Matters: Eliminating these high-cost debts frees up future cash flow and reduces financial stress.

• Next Step: Once paid off, avoid re-borrowing from these sources if possible and explore alternatives like credit union loans.

3. Medical Bills

Medical debt usually doesn’t accrue interest, but unpaid balances can still harm your credit if sent to collections. Use your holiday bonus to pay down these bills, particularly if they’re close to going delinquent.

• Negotiation Tip: Contact your healthcare provider for a potential discount. Many offices offer reduced rates for upfront payments.

4. Past-Due Bills

Bringing overdue accounts current—like utility bills, rent, or car payments—should be a priority. Delinquent accounts can lead to penalties, service disruptions, or even repossessions, all of which negatively affect your financial standing.

• Immediate Benefit: Paying off past-due accounts can stop late fees and prevent damage to your credit score.

5. Student Loans

While student loan interest rates are often lower than credit card rates, paying extra toward them can reduce the overall interest you’ll pay over time.

• Current Considerations: With federal student loan payments resuming, making an extra payment could help you get ahead on interest and principal.

6. Emergency Fund

If you’re debt-free or have low-interest debt, consider putting your bonus into a high-yield savings account to build or bolster your emergency fund.

• Why It’s Important: Financial experts recommend having 3-6 months of living expenses saved for unexpected events like job loss or medical emergencies.

• Recommended Accounts: Check out NerdWallet’s Best High-Yield Savings Accounts (https://www.nerdwallet.com/best-high-yield-savings-accounts) for current rates.

Final Thoughts

Using your holiday bonus wisely can set you up for long-term financial success. Prioritizing credit cards first will deliver the most immediate benefit, but any debt payment or savings contribution can help you step into the new year with a stronger financial foundation.

Action Plan:

• Assess your current debts and interest rates.

• Create a payoff strategy (avalanche or snowball).

• Set a portion aside for savings if possible.

By tackling high-interest debt and bolstering your financial resilience, you’ll turn your holiday bonus into a gift that keeps on giving.