Beware of piling on the pounds with credit card debt

15  January 2013

What does Christmas mean to you? Too much food, perhaps, a Bond film on the telly and carols from King’s? But the reality is that for most Brits, Christmas also means piling on the debts. And there is little avoiding it: from presents, to treats, to keeping the house warm while you’re off work, Christmas is a very expensive time.

So if you have to resort to credit over Christmas, what are your options, how can you keep the costs to the minimum, and what types of credit should you avoid like the plague – no matter what the shop salesperson tells you?

Although it is still difficult to get a mortgage without a hefty deposit and a squeaky clean credit record, the short-term credit taps are gradually being turned back on again. The Bank of England, through its Funding for Lending programme, is injecting extra money into the banking system, and some of this is finding its way to consumers in the form of credit cards and loans. As a result, the market for credit cards has hotted up in the run up to Christmas. “We have seen a loosening, no doubt. With more competitive loan and credit card deals now available, this may not be seen in lower interest rates but more in the offer of longer interest-free and balance transfer periods,” says Andrew Hagger from Moneycomms.

Mr Hagger points to Tesco, M&S Bank and Halifax all offering 0 per cent interest on new purchases – for 16 months in the case of Tesco and 15 for M&S Bank and Halifax. After the interest-free period rates revert to 15.9 per cent for M&S, 16.9 per cent for Halifax’s All-in-one card and 17.9 per cent in the case of Tesco’s Clubcard credit card. And as Kevin Mountford at Moneysupermarket points out: “You get Clubcard points with the Tesco card and M&S points with the Marks and Spencer card.”

However, not all Christmas debt can be cleared at once, and many will already have a balance on their existing credit card. This is where balance transfer interest-free periods become important. Sarah Pennells, founder of the financial advice website SavvyWoman.co.uk says: “If you want to transfer your balance, Barclaycard currently has a card charging 0 per cent interest on balance transfers for two years. The fee is pretty steep at 3.2 per cent (it works out at £64 if you transfer £2,000), but it could save you a lot in interest if you can’t clear your credit card debt in the next couple of months.”

Other balance transfer credit cards worth looking at, according to Mr Hagger, include the NatWest platinum which offers 23 months at 0 per cent, reverting to 17.9 per cent APR (balance transfer fee 3.5 per cent) and the HSBC card, with 23 months at 0 per cent then 16.9 per cent APR (balance transfer fee 3.3 per cent).

For those with large balances which they plan to pay off relatively soon, the new MBNA platinum card offers 0 per cent for 14 months but, crucially, the fee is just 1.25 per cent. This means that someone looking to transfer £5,000 on to the MBNA card would pay only £62.50, which compares very favourably with the NatWest platinum card, for instance, which would levy a fee of £175 for the same transaction.

The MBNA offer is open only to customers who apply through its website by the end of December.

Balance transfer maybe a good way to go, according to Mr Hagger, as it’s unlikely that a new card application would be processed this side of Christmas. “You’d be pushing it to get one this side of Christmas if even you apply today. However the balance transfer card is a sensible option if you need to spread your Christmas debt over the first two or three months of the New Year.”

Mr Hagger adds that if you have a cashback credit card such as the American Express Platinum cashback card, which pays 5 per cent for three months, capped at £125, or the Capital One Aspire World card, which pays the same 5 per cent for the first three months, capped at £100, then Christmas can be an ideal time to build up rewards and then transfer away in the new year to a 0 per cent deal.

But because balance transfer deals are so sought after, lenders can be choosy. “You’re more likely to qualify if you earn £20,000 a year or more, have had credit agreements for the last four years and managed them well,” Ms Pennells says.

All in all, if it simply has to be for Christmas, credit card debt shouldn’t be for life. “What you want to avoid at all costs is still paying for Christmas 2012 at this time next year, Mr Mountford says. “If you must borrow then have a budget and a plan for repayment in place.”

What the experts say

Store cards

Andrew Hagger: “With the average store card rate at 28.2 per cent APR and a number of cards charging 29.9 per cent APR, I wouldn’t touch most store cards with a bargepole. The only exceptions are Debenhams, House of Fraser, Laura Ashley and TopShop where the rate is 19.9% and not too much higher than the average credit card rate”

Overdrafts

Kevin Mountford: “Overdrafts are expensive and if you dip into yours ensure that this is on an approved basis or else the charges will soon escalate and again make sure it is for a short term fix.”

Payday perils

Sarah Pennells: “If you need to borrow money to get you through Christmas, whatever you do don’t go to a payday loan company.

Kevin Mountford: “The evidence is that the cost of payday lending is going up rather than down.”

Paying debt back

Sarah Pennells: “Overpay the debt charging the highest rate of interest so your money works as hard as it can. Make sure you pay the minimum or the fixed payments (if it’s a loan) on all your other debts. Once you’ve cleared one debt, work down to the next highest interest rate and so on.”