Survive Christmas without a financial hangover

Will yours be a plastic Christmas? For millions of us, that's exactly how we propose to spend an estimated 10 per cent of our annual disposable income. Using credit to pay for the festivities is not necessarily a bad idea. But using the wrong card can lead to bad hangovers in the new year. Iain Morse leads us through the options.

The people who run Harrods are happy this year. Punters are rolling in through the doors, tills are bleeping and spending at the checkouts is up to the limits one would expect for so famous a store. A Harrods spokesperson says: "We are out of the recession and people feel confident."

But for the rest of us, whose spending is likely to take place in far more prosaic surroundings, the festivities can lead to liquidity problems, and not just the hangover type.

Credit cards are one way of easing cashflow worries. Most of us have one and, with more than 21 million Visa cards in the UK, the indications are that our plastic friend will bear the brunt of the Christmas bills.

Royal Bank of Scotland has researched consumer behaviour over the Christmas period. At RBS, Jayne Goodwin thinks we have learned to use credit cards as a temporary source of borrowing. "We see a lot of card spending in the four weeks leading to Christmas. Last year this totalled pounds 125m, with a 30 per cent increase expected this year. In January, personal overdrafts and loans take over as customers refinance their borrowing."

The basic principle of card spending is simple enough. Most offer up to 57 days' interest-free credit on spending up to their limit, usually set at a minimum balance of pounds 500.

But there are some snags, quite apart from whether you can afford to clear the balance. Securing the maximum period of interest- free credit depends on spending at just the right time. This in turn depends on when your monthly card statement is prepared. The art lies in shopping just after this date. The amount will be added to your next statement, with payment due 21 days later.

So if your statements are prepared on 10 December, you will have to pay by the end of January. If your statements are dated 20 December, you can delay paying until near the middle of February. Check your last statement for the date it was prepared and shop accordingly.

But if you can't clear the whole balance by the due date, most cards from high street banks offer no interest-free credit. Instead, they charge daily on the whole amount of the balance. Late payment usually costs pounds 10 to pounds 12, with NatWest top at pounds 20.

The exact basis on which interest is charged may also vary. Some cards, like Bradford & Bingley's, charge from date of purchase. Others, like TSB's, from the date at which a purchase is charged to your account. A gap of two days between spending and when the charge is added is average. If you use the card just once each month and pay it off in full, then charging from date of purchase will add 24 days of interest to the annual cost of your card.

In exchange for notional periods of free credit, you do pay more expensive annual percentage rates (APRs), mostly between 18 and 21 per cent. Worse still, lenders add between 1 and 2 per cent to this on credit balances arising from cash withdrawals. Gold cards, open to those earning pounds 20,000 or more, charge on average 1 per cent less than standard versions. There is often a cost attached to having a card in the first place, but if you have one already, this won't affect your spending either way.

Many cards offer extra "free" benefits; loyalty points, travel insurance and purchase protection. For instance, Alliance & Leicester offers cover against loss, theft or accidental damage for 100 days on purchase values between pounds 50 and pounds 5,000. Cover is all risk, but includes a clause stating "unless the item is otherwise insured", in which case you can't claim.

Loyalty points are also on offer from card providers. Spend pounds 250 with Sainsbury's Reward Card and you accumulate points enough for a store voucher worth pounds 2.50.

Using credit cards allows the "double-dipping" option, where spending entitles you to loyalty points, cash off your gas bills, Air Miles and a plethora of special offers.

Store cards are more expensive. Aside from John Lewis, charging 18 per cent APR, most levy rates between 29 and 30 per cent. Timecard, valid at Comet, Woolworths and B&Q, comes top with a rate of 31.90 per cent. There are alternatives. New bank cards such as Royal Bank of Scotland's Advanta, are now being launched with discounted rates. Advanta's APR is just 9.9 per cent, but only until July next year, when it goes up to 18.55 per cent, giving you six months to pay for Christmas presents at an attractive rate.

Elsewhere, the Co-operative Bank offers its Advantage Visa card with a discounted APR of 7.9 per cent until April, when rates go up to 10.9 per cent. This is cheap borrowing, but there is no interest-free period.

According to the Co-op's Dave Smith: "We've segmented the market and aim for those who want to use a card as a continuous source of credit." The card is open to non-account holders at the Co-op.

Personal overdrafts charge equivalent annual rates (EARs) on outstanding balances. The best deal comes from Alliance & Leicester at 9.5 per cent, but most cost 15 per cent or more, with Clydesdale and RBS coming top at 19.56 per cent. Monthly arrangement fees of around pounds 10 will usually be added. To get the best deal you have to switch banks, and it may be too late in the day to do it for this Christmas.

Unsecured loans are another option, but care is needed. As a general rule, the shorter the term and the smaller the amount borrowed, the higher the APR. This will be fixed at outset, with monthly repayments combining interest and capital.

If early redemption of the loan is planned, expect to be penalised with an excess charge of two months' interest.

On loans of pounds 500 over six months, expect to pay not less than 16.9 per cent from Midland and as much as 25.8 per cent from Yorkshire Bank.

Some lenders also offer flexible loans with no minimum repayment period and lump sum repayment facilities.

Clydesdale Bank is competitive with an EAR of 19.2 per cent on loans between pounds 500 and pounds 5,000, repayments on a weekly, fortnightly or monthly basis and no early redemption penalty. Drawbacks include a pounds 35 arrangement fee and minimum pounds 100 drawdown, but if you want the early redemption option, this is good value.

If in doubt about whether you can afford Christmas, apply the Scrooge test: which is worse, being in debt, or not spending at all? And remember, he only had to deal with the Ghost of Christmas Past.

Best borrowing deals - a Christmas selection

Cards

Co-Operative Bank Advantage Visa

offers 7.9% APR until 31 March 1998, then 10.9%. Phone 0800 109000

RBS Advanta

offers 9.90% APR until 1 July 1998, then 17.9%. Phone 0800 077770

Loans (pounds 500 over six months)

Midland Bank (unsecured) Clydesdale Bank (flexible)

19.9% APR. Phone 0800 180180 19.2% EAR. Phone 0800 240024

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