Credit: Make sure a new year hangover is not on the cards - Loans & Credit - Money - The Independent

Credit: Make sure a new year hangover is not on the cards

As the shopping festivities start, Chiara Cavaglieri shows how to stop your flexible friend from becoming a fiend

Take a walk down any high street today and you'll no doubt see Christmas shoppers out in force. This is the time of year that the credit card balances of millions of Britons take a not so festive pounding.

Research from Airmiles, the travel rewards scheme, shows that UK shoppers plan to spend about £300 each on Christmas presents alone this year, totalling a colossal £10.5bn. Budgets can quickly go out of the window, but there are some simple ways to make sure you don't start 2010 with a debt hangover.

One of the cleverest ways to spend at Christmas can be with a 0 per cent purchase credit card. Right now, several cards offer an impressive 12 months interest-free, including the Tesco Clubcard Mastercard, which also offers 0 per cent on balance transfers for six months and five Clubcard points for every £4 spent at Tesco or one point for every £4 spent elsewhere.

"If you have a good credit rating, think about changing your credit card to take advantage of a 0 per cent introductory purchase offer. That way, you can spread the cost of Christmas without paying interest," says David Black, a banking expert at analysts Defaqto.

These cards are ideal if you're concerned about covering all your Christmas spending with your December salary or having to dip into any savings. It essentially works as an interest-free loan. However, if you think you will struggle to pay off the minimum balance each month, steer clear. At 0 per cent, these cards can easily tempt you into spending more than you can afford to pay off each month, and if there is an outstanding balance once the introductory period is up, the interest will quickly mount up.

Lending criteria are still extremely tight. Many credit card companies are willing to lend only to those with a perfect credit record. Making multiple applications for credit cards and being rejected will damage your credit rating, so it's worth checking your record with one of the three credit reference agencies: Equifax, Experian or Callcredit. This will allow you to scan for any errors and ensure that your record is amended. You can also attach short explanations for lenders if there are any other blemishes, but if you have a very poor rating it may be prudent to avoid applying for the best deals altogether.

For anyone lucky enough not to need credit, you can still be rewarded for your spending this Christmas. Reward credit cards are the perfect tool for the savvy shopper – if used correctly. These cards come in various guises. Some will offer cashback on all your spending, while others offer the chance to build up airmiles and loyalty points.

"Many reward cards offer additional points or cashback for the first few months. It is well worth getting one before you start making your big purchases over Christmas and the Boxing Day sale period in order to take maximum advantage of this," says Rumina Hassam from comparison service uSwitch.com.

Last week American Express launched its rewards credit card, which offers three points for every £1 spent at major UK supermarkets, two points for £1 spent at department stores and one point for money spent elsewhere. Points can be redeemed for vouchers to shop in Marks & Spencer, Harrods, HMV, House of Fraser, Comet as well as Molton Brown and other big names. If you don't fancy making use of the points system, the Barclaycard Cashback card is a good alternative paying, 1 per cent on the first £2,000 spend each year and 0.5 per cent thereafter.

In the run-up to Christmas, store cards are offered with regularity in shops. The appeal of an instant discount while you're at the till is understandable but the interest rate on these cards can be extortionate. Among the highest rates for store cards are the Burton, Miss Selfridge and Warehouse cards, all of which charge 29.9 per cent, nearly 60 times the Bank of England base rate.

The only exception is if you're struggling to get credit anywhere else. In some cases store cards can be the lesser of two evils as sub-prime credit cards, aimed at those with poor credit ratings, actually charge much more than most store cards. The Vanquis Visa Card, for example, charges from 39.9 per cent to a massive 59.9 per cent APR variable. "As a rule of thumb, store cards are best avoided but for some with patchy credit records they may find that the rates they are asked to pay on credit cards aren't too dissimilar," says Mr Black.

A 0 per cent transfer card, which allows you to transfer outstanding credit card balances on to one card, and pay no interest for an introductory period, may prove to be a lifeline if you're struggling with mounting debts. The longest introductory period around is offered by Virgin at 16 months with a 2.98 per cent handling fee and an APR of 16.6 per cent.

Balance transfer cards give you some breathing space from your debts and the chance to pay them off without incurring any more interest, but they do come with strings. There is a handling fee of about 3 per cent to move your balances. It is also crucial not to use balance transfer cards for spending as they typically charge a high interest rate on purchases. And, because credit card companies require you to pay off the cheapest debt first, your debt costs more to pay off in the long run. Nationwide and Saga are the only companies offering a positive order of payments, so use a separate credit card for purchases.

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