How to avoid Christmas debt
The decorations hit the high street in August, so we get a fair bit of warning that Christmas is on the way. Yet every year it can feel like it sneaks up on is, before we’ve had time to prepare financially for the onslaught.
It’s always difficult to stretch our income to cover the cost at the last minute, but this year, with the cost of everything pushing us to breaking point, and the average cost of Christmas hitting £569, it’s harder than ever.
Research by Hargreaves Lansdown showed that only half of us can cover at least some of the cost of Christmas from our income, and just one in three have savings to pay for it.
This means a lot of borrowing – with one in five people using a credit card and almost one in 10 making the most of buy-now-pay-later deals.
And this borrowing can cost us dearly. More than half of us expect to pay off our borrowing within a month — so we can escape hefty interest payments. However, almost two in five will take on to six months, and almost one in 20 will take more than six months — so there’s a risk they’re still paying off their Christmas debts while borrowing for their summer holiday. And every month we’re carrying our debts can mean racking up interest.
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Even with the best of intentions there’s a risk that borrowing can go awry, especially this year. With such a struggle to make ends meet, having to repay debt and interest on top of our monthly costs is going to make things even tougher. It makes it vital to keep debt to a minimum, and plan it carefully, so any debt hangover is less painful, and doesn’t linger for months.
How to avoid Christmas debt
If you’re running short of cash, it’s not too late to cut your festive spending.
If you still need to buy food and drink, can you ask family to bring something with them? If you have presents left to buy, will some of those people agree to skip gifts this year? If there are events that will cost money, which ones go you most want to go to, and which ones can you miss?
These cuts should extend to things you’ve already bought. If you’ve overdone it, what can you take back? Alternatively, are there any people you could agree not to buy for, and return their gift or give it to someone else instead?
If you need to make tricky cuts, don’t be afraid to be honest with your friends and family about it.
You could agree to celebrate with some people in January or February instead, when your finances are closer to normal. Or you could agree to skip presents, or go for a pared-down dinner. Most people would rather you avoided difficult debts than bought something you couldn’t afford.
How to borrow sensibly
If you do need to borrow, think carefully about the most sensible way to do it. If you just borrow on an existing card, you’ll pay an average of 21%, and in some cases will pay up to 40%, which is quite a price to pay for overspending. If you know you’ll need a card, plan ahead for it so you can apply for one with a low rate, or a 0% deal on purchases for long enough to have paid it off.
Of course, the golden rule with any credit card is not just to repay the minimum each month, which is your ticket to carrying debts for years and paying a fortune for the privilege. The idea should be to pay it back as soon as is realistic — without getting yourself into more trouble.
You should beware your overdraft too.
You can no longer be charged more for going into the red on your current account without arranging an overdraft. However, as a result, the banks tend to charge everyone more, so you can easily face an overdraft rate of 40%. It’s worth making alternative plans before you risk running up an overdraft.
It’s also essential to think before you borrow.
Read more: How to cut the cost of Christmas
For some people, because there’s no interest on buy-now-pay-later, they don’t really think of it as borrowing, so they rack up a huge number of these debts without really considering them.
However, these are debts, and because there are only light credit checks when you take them on, there’s a risk you rack up more than you can afford.
If you use this form of borrowing, you need to consider how you will afford all the repayments. You should also keep detailed records of all the money you’re borrowing, so you don’t accidentally take on more debt than you can afford.
If you make it to the end of the festive period with little or no debt, then instead of spending months desperately trying to get back to zero, you can use that money to start regular monthly savings. That way, by the time you get to next Christmas, you should have plenty of money to cover the cost. So you only have to worry about getting to all the Christmas jobs in time – rather than how you’re going to afford them.
Sarah Coles is a personal finance analyst at Hargreaves Lansdown and co-presents Switch Your Money On podcast.
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