How to manage Christmas debts
Christmas could be the straw that breaks the camel’s back. Most of us face an uphill struggle to get to the end of every month, but at the most expensive time of the year, it can easily become an impossible challenge.
It means more of us are likely to need to borrow in order to cover the cost of Christmas this year, so it’s worth sidestepping the pitfalls of festive borrowing, in order to avoid a nasty debt hangover in the new year.
Read more: 2022: Year in review
Each year Hargreaves Lansdown surveys people to find out how they’ll cover the cost of Christmas, and most years around 55% of people say they’ll pay for at least some of it from their salary. This year that has dropped 10 percentage points to 45% — and for those with children living at home it fell to 37%.
As a result, around a third will dip into savings, which leaves a huge number of people falling back on borrowing.
The most common form of borrowing is always credit cards — which one in seven will use this Christmas — rising to around one in five among men and parents.
The risk is that rather than planning ahead for this, people end up borrowing on an existing card, and paying interest at 22% or more. If you borrow £1,000 at 22% and pay back £85 a month, it will take a year to repay and cost £123 in interest.
Read more: How to spot financial abuse and what to do about it
If you can’t avoid using a credit card, it pays to make that decision early, shop around, and look for a card with the lowest possible rate — or ideally one with an interest-free period on purchases.
You still need to factor in debt repayments eating into your salary in the new year, but it can spread the cost of your shopping, without racking up interest.
One of the biggest risks with card borrowing is that once you have debts, you’re tempted just to make the minimum repayment each month — which can be 1% of the debt, plus interest, or £5 — whichever is lower.
This can feel like a small price to pay for carrying debt — and can make us feel we’ve got thousands of pounds of debt under control. However, if you don’t pay it off faster than this, you’ll carry the debt for years, and pay a fortune in interest.
About one in 20 people will end up using a store card this Christmas — rising to one in 10 of those aged 18-34.
When you’re offered a store card at the till in return for a discount, it seems like easy money. However, if you can’t clear the debt within the first month, and you end up paying 40% interest for months, you’ll bitterly regret having been tempted in the first place.
Borrowing £1,000 at 40% and repaying £85 a month means it will take you over two years to repay, and cost £235 in interest.
It’s always best to steer clear of store cards, unless you can definitely repay it in full and on time, so you never have to pay interest.
Buy now, pay later
The number using a store card has actually dropped slightly over the years, as it has been overtaken by buy now, pay later deals.
These are now the second most common form of festive debts — used by one in seven of those aged 18-34 to pay for Christmas.
Read more: How to cut your council tax bill
If you take on manageable debts it can be a useful way to spread the cost. The problem is that lighter credit checks raise the risk people are taking on more debt than they can afford.
It means if you choose this approach, you need to keep rigorous records of what you’re borrowing, so you can see how your monthly repayments are adding up before you decide whether or not to keep shopping.
In an ideal world nobody would borrow for Christmas, and we’d put the brakes on spending before we went into the red.
However, we don’t always live in an ideal world, so if you have to borrow, the golden rules are to plan it carefully, borrow at the lowest possible rate, borrow no more than you can afford, and work out how you will be able to make repayments in the new year, so you can clear it as quickly as possible.
Watch: How to prevent getting into debt
Sarah Coles is a personal finance analyst at Hargreaves Lansdown and co-presents Switch Your Money On podcast.