Tis the season to spend your money wisely and prevent the build up of debt

CREDIT card spending has tumbled this year as households worried about their finances have battened down the hatches – but the coming weeks threaten to change that. Experts fear that Christmas spending could inflict massive damage on household finances over the coming weeks, with many Scots turning to credit cards and store cards to cover their festive season costs.

One in five households plans to use credit cards to pay for Christmas, according to new research by Legal & General, which also found that almost a third of Scots believe they don’t have enough money to fund Christmas presents and celebrations.

That suggests many will be digging out their credit cards and taking advantage of store card discounts over the coming month. But with inflation eating away at incomes and unemployment on the rise, the hefty card bills landing on doorsteps early next year – alongside the biggest energy bills on record – could add to the pressure on cash-strapped households.

The first two months of the year, when the repayments begin to accumulate, are when debt worries really pile up, according to Susan McPhee, head of policy at Citizens Advice Scotland (CAS).

“Many of the people who end up drowning in unmanageable debt are people whose debts began at this time of year and then spiralled out of control. It’s tragically predictable – and in many cases it is so easily avoidable,” she said.

The best advice is to steer clear of credit altogether, she added. “If you think about it, using credit is paying someone a fee just for spending your own money. Logically, why would you do that?

“And why would you buy something with a credit card if you have the money in your pocket? Yet millions of us do this every day. It’s always much better to use cash, or a debit card that doesn’t involve credit.”

But for those on low incomes who do have to borrow to get by, researching lending options is essential, said McPhee. “You should never enter into any credit agreement without knowing exactly how much you will be expected to repay, and how you will do so.”

This Christmas, many Scots will feel they have no option but to resort to credit and store cards, even if they manage to reduce their festive spending. So the onus is on finding the best deals possible – and avoiding expensive pitfalls.

Store card spending has plunged by a fifth since August 2010, but Britons are still spending £1.83 billion on them each year. Shoppers taking out a card typically get a discount on their initial purchase of between 10 and 20 per cent, but the repayments are usually in the region of 25 to 30 per cent.

That compares with the average credit card repayment rate of 18.7 per cent APR, according to David Black, banking analyst at Defaqto. He added: “It may be worth getting the discount but, because of the high interest rates charged, it will pay you to then clear the balance by the due date instead of utilising its ongoing credit facilities.”

Interest rates range between 19.9 and 30.9 per cent, while there are also penalties of £10 to £12 for late payment. The most expensive store cards on the high street are those from USC (30.9 per cent), while Evans, Burton, Dorothy Perkins and Miss Selfridge are among those charging 29.9 per cent. At 29.9 per cent a £250 purchase could end up costing £325 when the interest is added, unless the balance is paid off quickly. At 19.9 per cent House of Fraser, Debenhams and Top Shop are at the cheaper end of the scale.

The cards can help save you money, but only if you limit your purchases to the initial discount deals and pay off the balance before any charges accrue. Some brands, including House of Fraser and Marks & Spencer, also offer rewards enabling customers to build up credits when they spend a certain amount on their card.

Credit cards are generally cheaper, but good deals are increasingly difficult to secure.

The average credit card charges 18.7 per cent APR, a huge margin on the current base rate of 0.5 per cent, but masking a wide variance in the deals available.

The credit card market has changed in recent years, with the best deals limited to those with the cleanest credit records.

Black explained: “Credit card providers have tightened up their underwriting and acceptance criteria and are increasingly focusing their marketing efforts in this area on their existing customers and typically their current account customers.

“To get the best deals, you have to have a great credit record.”

The recent competition also explains an increase in the number of cards with 0 per cent introductory periods. The longest 0 per cent periods on purchases are on the M&S credit card and the Tesco Clubcard credit card, both at 15 months.

As for balance transfers, Barclaycard and Bank of Scotland are currently promoting the longest 0 per cent deals on record, at 22 months. The former has a 3.2 per cent fee (2.9 per cent on applications made through the Barclaycard website) and the latter a 3.5 per cent fee.

A number of providers now offer cards that boast incentives such as cashback, airmiles, bonus points and shopping rewards to those who always clear their outstanding balance each month. Capital One, American Express, the AA and Santander are among those paying cashback on purchases at outlets including department stores, supermarkets and fuel stations.

And Barclaycard last week unveiled a cashback rate of 11 per cent rate on its platinum balance transfer card. To qualify for the reward – capped at £100 – customers must transfer a balance to their Barclaycard before 31 December.

Black said: “If you are confident that you can repay your entire credit card balance every month, then you’re missing a trick if you don’t use a credit card that offers rewards. Rewards tend to fall into four categories: air miles, cash back, points schemes, shopping rewards. The key is to choose a card with the type of reward that you want and that fits your circumstances.”

But if you can’t be sure of clearing your entire balance each month, then you are better off resisting the rewards incentive and instead looking for the lowest interest rate charged, as the interest on the reward card will quickly wipe out any gains made.

The lowest interest charge on purchases (where there’s no introductory offer or reward) is the 6.9 per cent rate on the Sainsbury’s Low-Rate credit card.

Then there’s the range of cards that are effectively subprime, made available to those excluded from the mainstream deals and with significantly higher charges. In the current climate, even these cards are out of reach of many, however, with providers still rejecting applicants they fear may not be able to make their repayments.

This market is relatively small but one of the best known providers is Vanquis. Its Bank Visa credit card charges between 39.9 and 59.9 per cent.

The MI Money Granite credit card levies the same rates, while the SAV Credit Aqua card has an APR of 35.9, 37,9 or 39.9 per cent.