Everyone over indulges at Christmas. The bad news is that we can do nothing to help you with your hangovers and tight trousers. The good? We can help with the financial woes you might be facing come January.
Clearly, it is a little late in the day for us to suggest that you put away a little each month to cover the cost of Christmas (although it would be a really good thing for all of us to think about come next summer). But even now, there are bad ways and good ways to pay for your festivities. The bad ways will leave you with a frightening pile of debt and an interest rate that would shame the average doorstep lender. The good won’t.
Avoid store cards at all costs
If you are planning on going into the red to fund Christmas, watch how you do it. At half the checkouts you pass through, you’ll be offered the chance to take out a store card. That chance will be accompanied by an extra enticing deal – say 10% off all your purchases that day. That’s going to sound pretty good if you’re panic-buying everything in one shop. But don’t be drawn in.
Store cards offer just about the most expensive debt available in the UK – they are only topped by credit cards aimed at those with poor credit ratings. The average interest rate? An extortionate 25.3%APR. Get a card from Burton, Miss Selfridge or Warehouse, and you’ll pay 29.9%APR. Spend £250, and that adds up to interest of nearly £75 over a year (assuming you don’t pay the money back). That’s ridiculous. But the most amazing thing about it is that most of the people who take out store cards could just as easily take out a 0% card such as the Tesco Clubcard MasterCard. It offers 0% interest on purchases for 12 months, 0% on balance transfers for six months, and five Clubcard points for every £4 you spend at Tesco, and one point for every £4 you spend elsewhere. “It’s a good all-round card,” says Michelle Slade of Moneyfacts.co.uk. That’s something of an understatement for a card that allows you to effectively borrow money for free for a full year. This is the card to get if you are low on cash now, but are sure you will be able to pay off what you borrow before next Christmas rolls around.
Use a credit card even if you don’t need credit
Still, credit cards aren’t only for those going into debt. There are also some good reward cards out there where you can either earn points, airmiles or simply cash back from your Christmas spending.
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The Tesco Clubcard is a case in point – you gather Clubcard points that can be turned into all sorts of vouchers as you spend. So not only is the money free but you get perks too. Very nice. American Express has also just launched an enticing Express Rewards Credit Card. You get three points for every £1 spent at major UK supermarkets, two points for every £1 spent at department stores and one point per £1 spent elsewhere. Points can then be turned into vouchers for shopping in Marks & Spencer, Harrods, HMV, House of Fraser, Comet and at several other big names.
If you’d prefer to go for the more straightforward cashback option, then try the American Express Platinum. It offers 5% cashback on all purchases in the first three months up to a maximum of £100 cashback. After that, the rate falls to 0.5% on annual spending up to £3,500, 1% for spending between £3,501 to £7,500, and 1.25% if you spend more than £7,500.
However, the downside is that Amex cards aren’t as well-accepted as the likes of Visa and Mastercard. Also note that you must clear your balance every month: the interest rates on reward cards are far from the cheapest out there.
Be careful how you clear your debts
Whatever credit card you choose to use, be careful when paying off your debt. Most credit card companies – the much-to-be-praised exceptions are Nationwide and Saga – operate a ‘negative payment’ hierarchy. This means that the debt earning the least interest will be paid off first. In practice, that means that if you have a 0% purchase card and spend £400 and you also transfer a balance of £200 on a balance transfer rate of 12% the £200 will sit on your card accruing 12% interest while you clear the £400 debt.
So if you have a 0% purchase card, just use it for purchases and have a separate card for balance transfers.
And lastly, never take cash out on a credit card: no matter how nice the purchase or balance transfer rate is, the cash withdrawal rate will be jaw-droppingly extortionate. Think 25-28%.
• This article is taken from our weekly MoneyWeek Saver email.
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