How to get Christmas credit

Need extra cash to cope with the festive period? Don't get ripped off, warns Kate Hughes
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The Independent Online

The last thing anyone wants to do during an economic crisis is rack up debts, but try explaining that to the kids when Santa has failed to deliver the latest Nintendo Wii game. Short of cancelling Christmas, it is difficult not to spend extra money over the festive period. Many people will cope with these costs by using credit or store cards, or taking out a loan. But there is lots of choice, so make sure you pick the right deal for your debts.

Store cards

Being offered 10 or 20 per cent off all those presents you just dumped at the cash register can be tempting. It's by giving these discounts and special offers that store cards have become big business. However, in return, the customer ends up visiting the shop more often, and paying interest to the store for the privilege.

Offers on store cards include prize draws, previews and card-holder discounts. Some cards give extended interest-free periods as a reward for high levels of expenditure. The store card at women's clothes shop Coast offers 0 per cent for six months if £199 is spent in one transaction, and DIY store B&Q's card offers three months' interest free for a purchase of over £500.

These offers, though, don't compare well with those from credit cards, warns financial information website MoneyExpert.com, with 64 per cent of the credit card market giving 0 per cent deals on purchases for periods of between three and 12 months. The Barclaycard Breathe Mastercard (pictured), for example, offers 12 months' interestfree credit on new purchases. Its APR after that period is only 12.9 per cent, almost half that of the B&Q card at 23.9 per cent.

In fact, despite strongly worded complaints by the Competition Commission over "excessive profits", the interest rates on balances that you don't clear every month now average 25 per cent. Over half charge 27 per cent and the most expensive will cost you £30 in interest for every £100 you fail to pay off at the end of the month. That is more than one and a half times higher than the average credit card at 16.9 per cent. In fact, using a store card rather than a credit card could increase your interest payments by more than 50 per cent.

One of the worst offenders identified by MoneyExpert is the Creation Account Card which can be used across a range of stores including Sainsbury's, and Selfridges. It charges a huge APR of 30.9 per cent if you make payments other than by direct debit. Meanwhile Burton, Wallis and Dorothy Perkins store cards comes in a close second with an APR of 29.9 per cent.

"Store cards can be a useful way of qualifying for discounts but when it comes to borrowing they are a rip-off," warns Sean Gardner of MoneyExpert.com. "It is easy to be taken in by the hard sell. Many sales assistants will be on commission for these store cards with targets to hit," he adds.

"But as soon as the interest-free periods expire, store card users will face huge APRs. Many will plan to pay it off, but one in 10 is still clearing Christmas debts incurred 12 months previously."

If you do decide to apply for a store card, be selective. Applying for lots of store cards can harm your credit rating.



Credit cards

Financial advisers often warn people not to abuse their credit, but with careful planning it is possible to minimise interest payments and maximise rewards. Almost 16 million cardholders are missing out on bonuses such as cashback, reward points, money-off vouchers or air miles that they could be pocketing for free, according to American Express.

The AMEX Platinum Cashback Card offers 5 per cent cashback on purchases for the first three months, although the typical APR is 18.9 per cent. Or there's Abbey's new credit card which offers 3 per cent cashback on petrol and groceries, and 0 per cent interest on purchases for three months and for nine months on balance transfers.

"If you know you can pay the balance of the card off straightaway, a cashback card could be a good option," says Tracy North of price-comparison site uSwitch.com. "But if you can't pay it back, the amount of cash you get back would be negated by the interest rate you are charged.

"Watch out for balance transfer cards as well," she warns. These offer you 0 per cent interest on amounts you transfer from other cards. But if you then pay for items using that card, you'll still get hit for the interest.

If you miss a payment on a 0 per cent card, not only will you get a fine, but the card provider can also retract your 0 per cent deal because you've broken the contract, and charge you interest on the whole balance.

And then there's the year-round no-no: withdrawing cash on your credit card. Despite carrying APRs of up to 32 per cent, this is how 1.7 million people are planning to fund this year's credit crunch Christmas, predicts uSwitch.com.

The same warning goes for credit card cheques. Costing 26.7 per cent APR, fees and interest charges applied to these cheques are worth more than £570m for the credit card industry.

If you're sure you want to use a credit card but don't think you can clear the Christmas bill immediately, look at longer-term or "life of balance" cards instead, which offer a lower interest rate.

Capital One has a fixed interest rate of 8.5 per cent on balances until 1 August 2012. Or Barclaycard's Simplicity card will only charge you 6.8 per cent on debts transferred from another card for the life of the balance.

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Personal loans

A personal loan to cover your debts could mean cutting the interest rate you would otherwise pay on a store card and most credit cards.

"Loans can be a great fixed repayment vehicle for your Christmas funding," says Tim Moss, head of loans at price comparison site Moneysupermarket.com. "But despite cuts to the Bank of England's base rate, interest rates on personal loans are going up, and by the new year, I expect the average to be 10 per cent, so if you need a loan, arrange it now."

If you need £1,000 over 12 months, Sainsbury's Bank offers 18.7 per cent typical APR, which means a monthly repayment of £91.33. For £3,000, Alliance & Leicester's 12.9 per cent deal means you repay £266.82 a month. And for a £5,000 loan for 12 months, A&L's 8.8 per cent best buy interest rate would see you repaying £436.02 a month.

Ultimately, the choice of where to place your debt may not be yours. Almost 5 million people seeking new credit cards or personal loans have been rejected by lenders in the past six months, according to MoneyExpert.com, and 75 per cent of credit cards and personal loans now require borrowers to have a minimum income of £18,000.

However, how you plan to finance Christmas is a decision to make sooner rather than later.

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