Debt headache? A cure for hangovers is on the cards

After the Christmas and New Year sales party is over, the debt hangover begins. Consumer borrowing figures shot up in 1996, with credit- card expenditure rising by more than 40 per cent.

Some people will repay thousands of pounds of credit-card debt and overdrafts in the coming months. Maybe more, with end-of-sale bargains and holidays thrown in.

Some big spenders could end up paying at least twice as much as they need to for their credit. Save & Prosper's Base Rate credit card charges pounds 347.13 to borrow pounds 3,000 for a year, or 11.5 per cent APR. NatWest at 21.9 per cent and Lloyds at 22 per cent will cost you almost double that.

Sophie Gumpel, principal researcher at the Consumers' Association, says the rash of cheap credit cards accepting debt transfers, as well as cheap overdrafts, means many will do better giving unsecured loans, formerly a sensible option, a wide berth.

New and cheap American-backed entrants like RBS Advanta have an offer price of 11.9 per cent APR, rising to 16.2 per cent on 1 November. Peoplesbank charges 14.4 per cent APR. The Co-op Bank Advantage Visa has an introductory offer of just 7.9 per cent, and Capital One Bank's introductory offer is 9.9 per cent.

Midland Bank has pitched in at 11.90 per cent, also on an introductory basis, which is around half the rate of 21.6 per cent a year with its Mastercard or Visa cards.

Barclaycard, Alliance & Leicester and Halifax have fought back, with up to pounds 150 off balances transferred from other cards. Barclaycard and Alliance & Leicester give 5 per cent off, up to a maximum of pounds 150, and Halifax gives a maximum of pounds 50 for pounds 1,000 transferred.

Enlightened borrowers can engage in "balance surfing", moving their balance from company to company to reduce the total bill. Or they can slash the interest rate they pay for the life of the special-offer period, before transferring their debt to another limited-period offer elsewhere.

If you transfer your credit balance at the right time in the monthly repayment cycle, you could get a month's extra interest-free credit. Watch out, though: cards like the Save & Prosper Base Rate and Co-op Advantage have no interest-free period.

If you do clear your account some months then 54- or 56-day interest- free cards like those from Capital One Bank or Royal Bank of Scotland Visa are more appropriate. Barclaycard rewards cautious users with the initial transfer bonus and Profile Points. Or you could apply for a new Goldfish card, which gives you points towards your gas bill or shopping costs at Asda.

Keener interest rates have led to tighter credit-scoring criteria among card companies. Steven Richardson, retail banking director of Save & Prosper, says that with competition so fierce, customers facing refusal from one card company may well be accepted by another.

Overdrafts are another cheap way of borrowing. Barclays, Halifax and Royal Bank of Scotland all offer accounts where the first pounds 100 is interest- free. Woolwich charges 10.5 per cent APR for authorised overdrafts on its current account, Alliance & Leicester is asking 9.5 per cent for agreed overdrafts, and Bank of Scotland is pitched at 11 per cent.

Over longer periods, say two to five years, personal unsecured loans are a better bet. Northern Rock is best with 12.9 per cent, though compulsory insurance brings the APR to over 15 per cent. Royal Bank of Scotland Direct charges 14 per cent, followed by Nationwide at 14.9 per cent.

However, should you wish to repay before the agreed term, you will probably be saddled with an extra two months' repayments as a penalty.

q For full details of borrowing rates, telephone Moneyfacts on 01692 500677.

q Dido Sandler writes for 'Financial Adviser' magazine.