Christmas credit guide: How to manage your festive finances
In an ideal world, we'd all be able to pay for Christmas using our savings and there'd be no need for to slide into debt every December. However, millions of people find themselves having to turn to credit to pay for the festivities.
Get it right, and it needn't cost you a penny more than had you been able to pay with cash in the first place. Get it wrong, and your debt can run away with itself. But fear not, the Moneywise guide to Christmas credit is here to help you make sure you spend wisely.
As long as you stick to the agreed repayment terms, interest-free credit is the next best alternative to paying by cash. You can get interest-free deals on credit cards as well as direct from furniture, household and clothing retailers and even catalogue companies.
So whether you're planning to buy the kids lots of toys, and stock the fridge for the big day, or even buy a new sofa to fit all the extended family, this type of borrowing could serve you well as a way to spread the cost of Christmas without having to pay extra for the flexibility.
The longest interest-free purchase credit card deal listed on Moneywise.co.uk/compare is Sainsbury’s Nectar purchase credit card, which offers a 28 month interest-free period on purchases. After that you’ll pay 18.9%APR. An added bonus with this card is that you’ll earn Nectar points on your shopping – this could be especially attractive if you plan on doing your Christmas food shop in Sainsburys.
The Post Office’s Matched card is just behind at 27 months (also reverting to 18.9% APR). Both these cards will give you over two years to clear your Christmas spending, but you don’t want to be still paying for Christmas 2016 when 2017’s festivities come calling. So, try to pay off the debt in 12 months.
“Just make sure you make your repayments on time each month and don’t exceed your credit limit otherwise your 0% deal will be terminated on the spot and you’ll be paying upwards of 18.9%APR on any outstanding debt,” says Andrew Hagger, personal finance expert at Moneycomms.co.uk.
As for retailers offering interest-free finance options, John Lewis, Apple, Next,Very, Furniture Village, Harvey's Furniture, Goldsmiths and Jessops are just some of household names that offer the facility.
These agreements are different from store cards in that they are put in place for a single purchase, with payments spread over the length of the credit agreement. For example, you might buy a £1,000 sofa, with 12 equal monthly payments back to the store you bought it from.
A minimum spend is usually required to qualify for the finance agreement, repayment terms vary in length by retailer and the facility is always restricted to customers with good credit scores. Also, some retailers charge fees for early repayment so always check for these before you sign up to a deal. (Credit card companies, on the other hand, don't charge for early repayment so that's an added advantage).
And remember, these interest-free deals only do what they say on the tin as long as you stick to your repayment plan - miss a scheduled payment and you'll be charged interest thereafter.
Another option for interest-free borrowing is to go into your overdraft. Several current accounts have interest-free overdraft facilities. This way you can borrow what you need to cover your costs and repay it over the next few months.
Nationwide’s FlexDirect account comes with an interest-free overdraft for the first 12 months. You do have to fund the account with £1,000 a month though.
FirstDirect offers customers a £250 interest-free overdraft, again you need to pay in at least £1,000 a month in order to have this account.
Before you dip into the red on your current account make sure you have an overdraft set up – the fees on unauthorised overdrafts are astronomical – and also read up on what the fees are as many current accounts have hefty charges even on authorised overdrafts.
If you're unable to secure interest-free credit, your next best bet is a personal loan. This year’s cut to the Bank of England rate means there are so incredibly cheap personal loans out there. But to secure a rate that low, borrowers usually need to take out loans of £7,000 and above.
That may be on the high side for someone just looking to spread the cost of Christmas but even rates on loans of £2,000-plus are still a lot lower than the typical APR on credit cards.
For example, borrow £2,000 from RateSetter for one year and the headline interest rate is 7.3%. You’d have monthly repayments of £173.08 and repay £2,076.96 in total – so spreading the cost of Christmas over the next 12 months would cost you just £77.
That compares to a cost of £210 if you borrow £2,000 on a credit card with a typical APR of 18.9% and repay the debt in equal installments over a year.
Borrow £1,000 via a personal loan and the best rate you’ll get is again from RateSetter at 9%APR. That would mean 12 monthly instalments of £87.25 and a total repayment of £1,047. Again that is far cheaper than the standard credit card at a total cost of £47.
Also, you can repay your loan early if you find you can afford to do so. This would cut the interest even further.
A low-rate credit card may be more expensive than a personal loan but they are the best bet if you need to borrow less than £1,000.. Tesco Bank’s Clubcard Low APR credit card has the lowest rate at 5.9%APR and the added benefit that you’ll earn Clubcard points on your spending, which is particularly attractive if you plan on doing some of your festive shopping in Tesco.
AA, Bank of Scotland, Halifax and Lloyds all have low-rate credit cards charging 6.4%APR.
These are notoriously expensive, with typical rates in the region of 30%. For example, the Oasis store card has an APR (variable) of 28.9%. Sales assistants frequently ask customers if they want to sign up to store cards just as they make their purchases at the till and try to entice them with a one-off saving on their shopping there and then.
Remember, the money you save will pale into significance compared to the interest bills that will stack up if you don't clear your balance immediately.
However, if you are doing a big shop and are offered a store card with an initial discount on that spending it might be worth considering. But only if you can afford to pay off the balance in full before the end of the month.
For example, Oasis and Topshop both offer an immediate 15% off your shopping when you get the card. Just make sure you clear the balance and close the card before the end of the month. Also, bear in mind that the application for credit will appear on your credit file and could affect your ability to get other credit – too many applications close together don’t go down well with lenders.
While some big catalogue brands, such as Very, allow you to spread the cost of some purchases interest-free typically catalogues charge a small fortune to customers who opt not to pay upfront – interest rates are typically around 30% but can rise far higher. This is one form of festive debt you want to avoid at all costs.
The interest on the Very Account is 39.9% variable, and that headline rate is reserved for customers with the very best credit scores. If you are 'lucky' enough to bag the 39.9% rate, the ‘V by Very Premium Leather Biker,' (£140), balloons to £167 if you take a year to pay for it.
Meanwhile, the Freemans Catalogue offers a particularly expensive way to shop. Choose to buy the Apple iPhone 6S 32GB in rose gold from Freemans and you’ll pay £659 upfront. That’s £160 more than you’d pay if you bought direct from Apple. But, if you decide to spread the cost by putting the purchase on your Personal Account and repaying over 12 months you will be charged at least 34.9%APR (that’s if you have a good credit rating, if you don’t the interest will be higher). That means in total you would repay £771 in total. That means the iPhone will have cost you £272 or 55% more than if you had bought it from Apple.
Finally, remember that however you borrow that money you will have to pay it back eventually.
“Every pound you borrow before Christmas is a pound that you’ll have to repay in the New Year, so whilst there’s nothing wrong in borrowing to cover any Christmas shortfall – try to keep the amount you borrow at a sensible level – after all you don’t want to still be paying for Christmas come the middle of next year,” says Hagger.
An overdraft is an agreement with your bank that authorises you to withdraw more funds from your account than you have deposited in it. Many banks charge for this privilege either as a fixed fee or charge interest on the money overdrawn at a special high rate. Some banks charge a fee and interest. And other banks offer a free overdraft but impose very high charges for exceeding the agreed limit of your overdraft.
An account opened with a clearing bank (few building societies offer current accounts) that provides the ability to draw cash (usually via a debit card) or cheques from the account. Some pay fairly minimal rates of interest if the account is in credit. Most current accounts insist your monthly income (salary or pension) is paid directly in each month and they offer a number of optional services – such as overdrafts and charge cards – which are negotiable but will incur fees.
Used by the holder to buy goods and services, credit cards also have a monthly or annual spending limit, which may be raised or lowered depending on the creditworthiness of the cardholder. But unlike charge cards, borrowers aren’t forced to pay the balance off in full every month and, as long as they make a stated minimum payment, can carry a balance from one month to the next, generating compound interest. As the issuing company is effectively giving you a short-term loan, most credit cards have variable and relatively high interest rates. Allowing the interest to compound for too long may result in dire financial straits.
This is used to compare interest rates for borrowing. It is the total (or “gross”) interest you’ll pay over the life of a loan, including charges and fees. For credit cards where interest is charged at more frequent intervals, the APR includes a “compounding” effect (paying interest on interest). So for a credit card charging 2% interest a month (equating to 24% a year), the APR would actually be 26.82%.