The best credit cards to help tackle Christmas debt
Despite all those good intentions to budget and save money, most of us get a bit carried away at Christmas. However good your December, January can be a real misery if you're dreading the thud of your credit card bill hitting the doormat, wondering how on earth you're going to pay it.
Don't panic. A little bit of debt shuffling could be the answer to your prayers. Whether you have built up some debt in the run-up to Christmas or simply need to make some big purchases in the January sales, a credit card could be your best friend in the New Year.
"We all know that expenditure goes up at Christmas, and a credit card can help you manage the expense without being too costly," says a Halifax spokesperson. "If you think it will take a while to pay offyour debt, then it's well worth taking out a credit card that has a temporary 0% interest offer." But which one should you choose?
If you know you aren't going to be able to pay offyour credit card this month, and it's going to take you several months to clear the festive splurge, you should think about moving the debt onto a 0% balance transfer card.
With these cards you can buy yourself time to pay offyour debts without incurring interest. Instead, you are charged a small fee when you transfer your balance from existing credit cards, but after that you can pay offyour money without paying more interest.
So, for example, if you have a £2,000 debt on a normal credit card with an interest rate of 16% and it takes you 12 months to pay it offat £190 per month, you'll end up paying back around £2,170. However, if you moved that £2,000 on to a 0% interest balance transfer card with a 2.9% balance transfer fee and paid it offover 12 months you'd pay back £2,058 instead - saving yourself £112.
As the only thing you'll pay with one of these cards is the balance transfer fee, make sure you take it into account when shopping around. The best balance transfer card on the market is Barclaycard's Platinum with Extended Balance Transfer, which has a 23-month 0% interest period but a 2.8% balance transfer fee.
If you don't need 0% for that long, you may be better offgoing for the Barclaycard Platinum low transfer fee card, which only gives 0% interest for 12 months but charges a fee of just 0.9%.
Just make sure you either pay offthe debt before the end of the interest-free period or move the debt to another 0% card. The standard interest rates on these cards are high, at around 17% APR, so if you end up paying it you will quickly wipe out all the benefits of switching in the first place.
THE BEST BALANCE TRANSFER CARDS
|NAME||0% PERIOD||BALANCE TRANSFER FEE||STANDARD APR|
|Barclaycard Platinum with Extended Balance Transfer||24 months||2.8%||17.9%|
|NatWest Platinum Extended Balance Transfer||23 months||3.5%||17.9%|
|Tesco Clubcard Credit Card for Balance Transfers||22 months||2.9%||16.9%|
|Halifax 22 Month Credit Card||22 months||3%||18.9%|
|MBNA Platinum Credit Card||20 months||2.5%||16.9%|
Source: Moneyfacts.co.uk, 5 November
Plan your debt
If you haven't gone into debt yet but know that you are going to do so, perhaps because you need to make some big purchases in the January sales, then with a bit of forward planning you can avoid paying any interest at all. This could also be the solution if you find yourself with a rather empty bank account in January and need to put a bit more spending than usual on credit.
With a 0% purchase card you won't incur interest on the things you buy for a set period. The best on the market is the Tesco Clubcard, which offers 0% interest on purchases for 16 months. "Our Clubcard credit card allows customers to manage their Christmas spending or January sales purchases in a convenient way," says Will Curley, director of credit cards at Tesco Bank.
THE BEST PURCHASE CARDS
|NAME||0% PERIOD||STANDARD ARP|
|Tesco Clubcard Purchase Credit Card||16 months||16.9%|
|M&S Credit Card||15 months||15.9%|
|Halifax Online All in One||15 months||17.9%|
|Barclaycard Platinum Purchase||14 months||18.9%|
|NatWest YourPoints World Mastercard||13 months||17.9%|
Source: Moneyfacts.co.uk, 5 November
The best of both worlds
Finally, if you've built up some debt but still have some spending to do, a card that offers both 0% interest on purchases and balance transfers may be the answer. With one of these cards you can get the best of both worlds, not paying interest on either your existing debts or new purchases for a set period.
The best of the bunch is the Halifax All in One card, which offers 0% interest on balance transfers for 15 months with a 3% fee, and 0% interest on purchases for 15 months too.
"Credit cards can be useful tools in smoothing the peaks and troughs of our financial lives," says Paul Crayston, spokesperson for the Money Advice Trust. "They offer a relatively cheap and flexible borrowing option, just as long as you use them properly."
No matter which type of card you go for, there are a few simple rules you must follow if you want to keep your debt cheap. First, set up a direct debit to make repayments. That way you'll never miss a payment and incur a penalty. Second, make a note of when the 0% interest period ends and make sure you switch cards or clear your debt before then. Finally, "never borrow money if you can't identify exactly how and when you're going to repay it", adds Crayston.
Used by the holder to buy goods and services, credit cards also have a monthly or annual spending limit, which may be raised or lowered depending on the creditworthiness of the cardholder. But unlike charge cards, borrowers aren’t forced to pay the balance off in full every month and, as long as they make a stated minimum payment, can carry a balance from one month to the next, generating compound interest. As the issuing company is effectively giving you a short-term loan, most credit cards have variable and relatively high interest rates. Allowing the interest to compound for too long may result in dire financial straits.
Moving money from one account to another, whether switching bank accounts or more likely transferring the outstanding balance on your credit card to another card that charges a lower – or 0% – rate of interest. Some card providers may charge a transfer fee that can be a percentage of the balance transferred.
This is used to compare interest rates for borrowing. It is the total (or “gross”) interest you’ll pay over the life of a loan, including charges and fees. For credit cards where interest is charged at more frequent intervals, the APR includes a “compounding” effect (paying interest on interest). So for a credit card charging 2% interest a month (equating to 24% a year), the APR would actually be 26.82%.