Cold cures for those Christmas credit chills

Has the season of goodwill left you burdened with debts? Find an affordable way to repay them with advice from Sam Dunn
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The Independent Online

Count yourself lucky if a sore head is your only hangover from Christmas and New Year. The cost of the festive season will soon start catching up with us, and it is likely to come as a shock for many.

Count yourself lucky if a sore head is your only hangover from Christmas and New Year. The cost of the festive season will soon start catching up with us, and it is likely to come as a shock for many.

Online bank Intelligent Finance reports average credit card rates hovering around 16 per cent; so, with store cards also charging as much as 29 per cent, if you don't clear your debts as quickly as possible, they will soon mount up.

In an ideal world we would all clear our credit and store card bills in full every month. But if you're not in a position to do this, you should be able to reduce the charges by transferring your debt to a cheaper credit card, taking out a competitive loan, or simply by tighter budgeting.

"Many people suffer from their own inertia and allow themselves to pay too much," says Nationwide director Stuart Bernau. "If you don't keep much of an eye on what's going on, it's more than likely you will be paying over the odds."

It is easy to run up debts when the minimum repayment on credit cards can be as little as 3 per cent of the outstanding balance. And while a small, well-managed overdraft can keep costs down, this can be a very expensive way to handle larger amounts of debt.

Instead, advises Mr Bernau, start by considering debt consolidation, lumping your outstanding store and credit card balances, and that swollen overdraft, into one, more manageable monthly sum. "A cheap personal loan could help you sort these out," he adds.

Looking for the best rates on the market, rather than automatically applying for a loan from your bank, could save you hundreds of pounds in the long term. Researching on the internet is the easiest way to do this, but watch out for pitfalls. Headline rates can be misleading; many tempting annual percentage rate (APR) offers will depend on your credit rating or be reserved for existing customers. Check, too, whether penalties apply if you want to pay off the loan early.

Richard Mason, director at Money- supermarket.com, a website that compares the cost of financial products, also recommends that borrowers make a budget plan to see exactly how much they can afford to repay each month.

Keep an eye out for payment protection, the optional insurance you can purchase that will pay off the loan if you lose your job or are too ill to work. Mr Mason recommends shopping around for a separate policy if you want this, and not opting for the loan provider's own deal.

According to Moneysupermarket.com, Northern Rock offers one of the best deals around, at 6 per cent on loans from £1,000, depending on your credit rating. There are no redemption penalties for early repayment. For smaller loans of around £500, rates are much higher; Liverpool Victoria charges an APR of 13.9, Barclays Bank 16.9 and HSBC 17.8.

If you are in a position to pay off all your debts quickly, a cheap credit card deal could be the best option, especially if you have debts on a store card. The high street retailers Habitat, Bhs and Harvey Nichols all charge interest of at least 26 per cent. So if you have racked up debts in this way, switching the balance to a credit card offering 0 per cent on transfers will save you cash. But remember, if you don't manage to pay the balance off before the offer period ends, the lender's higher standard APR kicks in. Keep an eye on this standard rate; if it's high, you will have to think about switching to a cheaper card once again.

If you transfer a balance to a new card, always check the APR on new purchases, says Mark Hayes-Newington, commercial director at financial information provider Defaqto. This is often different to that on balance transfers. If your monthly payments are used to pay off the cheaper, transferred debt first, you could find yourself racking up higher charges on new purchases.

"You must look at the small print - check which balance will be affected first," Mr Hayes-Newington says. "If it appears too good to be true, then it probably is."

Rates change frequently as lenders struggle to outdo each other with special offers. With so many 0 per cent deals on balance transfers and new purchases, it can be tempting to be a "rate tart", shifting your debt from lender to lender and paying no interest.

But Nationwide's Mr Bernau warns that if you have large debts and have to put them on several credit cards with introductory offers, you could run into trouble. "[It's easy to forget] when the introductory period finishes and you can get hit [by a higher APR]," he cautions. "In these circumstances, it could be better to have one low, personal loan rate."

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