My, what big debts we've got: keep the wolf from the door

Credit-card bills snapping at your heels after Christmas and New Year?
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The Independent Online

As credit and store card statements arrive in the post, the uncomfortable truth about just how much we have splashed out over the festive period will hit home.

You may have recovered from your hangover after the New Year's Eve party, but the headache is set to continue for many people who celebrated a little too enthusiastically. As credit and store card statements arrive in the post, the uncomfortable truth about just how much they've splashed out over the festive period will hit home.

Research from internet bank Egg estimates that British consumers spent around £7bn on credit over Christmas. While some of us will clear what we owe in a single payment, £1.7bn will remain unpaid, and collectively UK cardholders will pay £21m in interest this month alone. But even if you can't clear your debts in one go, you can considerably reduce the interest charged by taking out a low-rate personal loan or transferring your outstanding balances to a credit card offering a more competitive deal.

"Rather than paying off each card individually, think about consolidating the debt into a personal loan," recommends David Bitner, product development director at The MarketPlace at Bradford & Bingley. "Not only will the payments be set and the debt cleared over an agreed period, but borrowers are likely to save on interest payments as these will often be far lower than the standard rate on a credit card."

The average interest rate on credit cards is around 16 per cent, but you can halve this by taking out a personal loan to clear your outstanding balances. And if you've used a store card for Christmas shopping, you'll be paying even more interest, since most have annual percentage rates (APRs) of between 26 and 30. Debts of this sort should be paid off as quickly as possible.

Generally, the more you borrow on personal loans, the more competitive the rate. For loans of £5,000, Liverpool Victoria has an APR of 6.9 and Lombard and Cahoot have APRs of 7. Abbey National has an internet-only loan charging 7.1 per cent interest; Loan One charges 7.2 per cent and the AA 7.3.

Many of us won't need to borrow that much; according to Visa, British consumers spent an average of £777 each on presents, food, drink, travel and entertainment over Christmas. Even so, there are still some good deals for smaller loans. Cahoot's rates start at 7 per cent for a £1,000 loan repayable over 12 months, although the rate you are charged will depend on your credit scoring. Nationwide charges 7.9 per cent and Intelligent Finance 8.3 per cent.

The length of the repayment period can also affect the rate you're offered. If you want to repay the £1,000 over six months instead of a year, Cahoot is the only lender still charging 7 per cent. The second-best rate is 16.5 per cent from Egg, making it cheaper to borrow the same amount over a year from Nationwide or IF. And your monthly payments would be half as much – around £86 as opposed to £174.

An alternative to taking out a personal loan is to consolidate borrowing on credit or store cards on to a low-rate credit card. "There is a huge saving to be made by transferring any balance outstanding on a store card to one of the numerous 0 per cent deals available on credit cards," says Stuart Glendinning a director at, a website that compares prices for financial products. "With interest as high as 30 per cent for store cards and 20 per cent with many of the high-street banks, it is almost criminal not to shop around for a better deal."

Many credit card providers offer interest-free periods, including Egg, RBS Advanta, Citibank, Nationwide, the Co-operative Bank, Sainsbury's, Marbles, Bank of Scotland, Virgin, Halifax, Morgan Stanley and Capital One. Most of these deals run for five or six months, although RBS Advanta's 0 per cent offer lasts until October. If you've got the self-discipline to pay off a certain amount each month so that your debt is cleared by the time the interest-free period is over, this is a cheaper option than a personal loan. But the temptation will be to use your card to spend more, so you need to be careful that your debts don't escalate.

If you've been carried away by the Christmas spirit and borrowed more than you can pay back during the introductory period on a credit card deal, then NatWest, Capital One and Morgan Stanley offer low transfer rates for the lifetime of the balance. Capital One and NatWest charge 5.9 per cent interest, while Morgan Stanley charges 6.9 per cent – again, cheaper than a personal loan.

But the best way to use such a card is only to clear existing debts, not to spend on it. Most providers adopt a hierarchy for dealing with credit card repayments, clearing the cheapest debts first and allowing borrowers to accrue interest at the highest rate. During the interest-free period, the transferred balance will be paid off first, with the standard rate applying to new purchases. The interest you pay on this balance is therefore much higher than the transfer rate – 11.5 per cent with Capital One, 16.9 per cent with Morgan Stanley and 17.4 per cent if you have a NatWest card.

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