Christmas credit guide: How to manage your festive finances

In an ideal world, we'd all be able to pay for Christmas using our savings and there'd be no need for our current account balances to slide towards, or into, our overdrafts. However, millions of people find themselves having to turn to credit to pay for the festivities.

Get it right, and it needn't cost you a penny more than had you been able to pay with cash in the first place. Get it wrong, and your debt can run away with itself. But fear not, the Moneywise guide to Christmas credit is here to help you make sure you spend wisely.

Interest-free credit

As long as you stick to the agreed repayment terms, interest-free credit is the next best alternative to paying by cash. You can get interest-free deals on credit cards as well as direct from furniture, household and clothing retailers and even catalogue companies.

So whether you're planning to buy the kids lots of toys, and stock the fridge for the big day, or even buy a new sofa to fit all the extended family, this type of borrowing could serve you well as a way to spread the cost of Christmas without having to pay extra for the flexibility.

The longest interest-free purchase credit card deal listed on is the Halifax Purchase Credit Card, which charges 0% for 20 months before reverting to 18.9% APR thereafter.

The Tesco Clubcard Credit Card (Purchase) is just behind at 19 months (also reverting to 18.9% APR) but has the added advantage of allowing cardholders to earn Clubcard points when they use the card to redeem in store or online - those could come in very handy for your Christmas groceries if you're a Tesco shopper.

Sainsbury's Bank Nectar Credit Card is another alternative, and is interest free for 18 months (again, it has an 18.9% APR at the end of the period).

And remember, even if the introductory 0% interest on purchases period on your credit card has expired and you have a zero balance on the card, you still won't pay any interest on purchases if you can pay for what you spend when your next bill arrives. Of course, that might only be a few weeks' breathing space but it might tide you over until after your next payday.

As for retailers offering interest-free finance options, John Lewis, Next, Very, Furniture Village, Harvey's Furniture, Laura Ashley and Oak Furniture Land are just some of household names that offer the facility.

These agreements are different from store cards in that they are put in place for a single purchase, with payments spread over the length of the credit agreement. For example, you might buy a £1,000 sofa, with 12 equal monthly payments back to the store you bought it from.

A minimum spend is usually required to qualify for the finance agreement, repayment terms vary in length by retailer and the facility is always restricted to customers with good credit scores. Also, some retailers charge fees for early repayment so always check for these before you sign up to a deal. (Credit card companies, on the other hand, don't charge for early repayment so that's an added advantage).

And remember, these interest-free deals only do what they say on the tin as long as you stick to your repayment plan - miss a scheduled payment and you'll be charged interest thereafter.

Personal loans

If you're unable to secure interest-free credit, the lowest rates of interest charged elsewhere are those for personal loans. This year has seen the arrival of rates under 4%. But to secure a rate that low, borrowers usually need to take out loans of £7,000 and above.

That may be on the high side for someone just looking to spread the cost of Christmas but even rates on loans of £2,000-plus are still a lot lower than the typical APR on credit cards.

For example, Metro Bank's personal loan of £2,000 has a headline rate of 7.9% and over a year sees borrowers repay £173.88 a month or £2,086.61 in total – so that's a cost of just under £87 to spread the cost of Christmas over the year.

That compares to a cost of £210 if you borrow £2,000 on a credit card with a typical APR of 18.9% and repay the debt in equal installments over a year.

But personal loan rates for smaller amounts, say £1,000, aren't that great. For example, the best buy on at the time of writing was the AA Loan Direct personal loan with a headline rate of 14.9%. Over a year, the total amount repaid would add up to £1,082.53; so it costs almost as much to borrow £1,000 for 12 months with AA as it would £2,000 with Metro Bank over the same period.

Also both loans have an early redemption charge. Metro's is 1% of the sum borrowed and AA's is 59 days' interest.

Find the best loan for you

Credit cards

A low-rate credit card may be more expensive than a personal loan but they are more flexible. They are also better suited for those borrowing smaller sums. MBNA, Sainsbury's Bank, Tesco Bank and the Co-operative Bank all have their own versions, with APRs under 10% - they charge 6.6%, 6.9%, 7.8% and 9.9% respectively.

If you have to spend on your existing run-of-the-mill credit card, chances are you'll pay interest of around 18% - so the sooner you pay off your balance, the better.

Find the best credit card with Moneywise Best Buys

Store cards

These are notoriously expensive, with typical rates in the region of 30%. For example, the Oasis store card has an APR (variable) of 28.9%. Sales assistants frequently ask customers if they want to sign up to store cards just as they make their purchases at the till and try to entice them with a one-off saving on their shopping there and then.

But remember, the money you save will pale into significance compared to the interest bills that will stack up if you don't clear your balance immediately.



While some big catalogue brands, such as Very, allow you to split payment over certain time periods interest-free, depending on how much you spend, if you end up using their standard payment terms, chances are you'll pay out interest in excess of 30%.

The interest on the Very Account is 39.9% variable, and that headline rate is reserved for customers with the very best credit scores.  But if you are 'lucky' enough to bag the 39.9% rate, the reasonably priced 'Coleen Boucle Oversized Coat with Fur Collar,' from the Coleen Rooney range (£79), balloons to just under £111 if you take a year to pay for it.

Meanwhile, the Freemans Catalogue has a pretty expensive way of buying an iPad. The iPad Air WiFi 32GB in Space Grey costs £620 to buy upfront (£141 or 29% more than the Apple Store price, which makes it something of a rip-off to begin with). But if you take the option to spread the repayments across 156 weeks (three years) at £6.09 a week, you end up forking out an enormous £950.04 at an APR of 34.9%. This makes the Freemans iPad 98% more expensive than it would have been had you bought it from Apple direct.