Tax

Message Boards Property Pensions Savings Utilities UK Stocks Investments clear all debts then save or both? Split in assets... Gold Shares Liquidity or Solvency? GaBumping when is the best time to SPEND View boards: Your Money UK Stocks Also on Yahoo! Finance Mortgages Insurance Loans Credit Reports Credit Cards Banking Savings Cut Your Bills Mortgage articles Can you trust a new build home? Save £962 On Your Mortgage Help Is At Hand For First-Time Buyers! House Price Falls: The Winners And Losers View archive Personal finance articles Three cheers for the credit crunch How much more will your holiday cost? National Savings - safe but not sexy Bradford and Bingley - should we be worried? View archive Investment articles Asian growth to offset US slowdown A mixed first half Pennies from heaven? A return to basics View archive

By Emma Tyrrell

The annual Christmas spending binge is almost upon us, so prepare to throw caution to the wind, and to splurge on expensive gifts, and lots of them.

Every year millions of us resolve to reign in our excessive generosity, and every year those resolutions are trampled underfoot as we panic, and join in the desperate last minute stampede to the high street.

And every year, just as surely, the horrible reality hits home once the credit card bills land on the doormat in January.

Last year we dutifully lined up to tell the pollsters that we planned to be more frugal over Christmas 2004, spend less on presents, food and decorations, and to fund our Yuletide spending from savings or income.

Fat chance.

When the figures came out in January this year, they showed December 2004 to be a bumper year for credit card spending, with high street purchases on plastic the highest ever recorded. The whole thing amounted to one gigantic game of chicken with the high street retailers, who – chewing their collective fingernails as shoppers appeared to spending less in November and early December – blinked first and introduced whacking great pre-Christmas sales.

In we trotted at the last minute, scooped up our bargains, and rushed off home to stash them under the Christmas tree. If it weren't for the fact that we ended up spending £30.8 billion, more than in December 2003, we would have had the last laugh. But we blew the budget, so the joke's on us, I guess.

Of course many of those who pile the Christmas spending onto their cards do manage to pay it off in full by the end of January, avoiding hefty interest charges, but a lot don't.

Last Christmas an estimated 20 per cent of us failed to clear our credit and store card bills in January, and up to a third slipped into overdraft.

Of course all the experts say we should plan ahead, and save up for Christmas. They are right, it's a much more sensible approach, but that doesn't mean that we're all going to do it. Some borrowers are still paying off their debts from last year's Christmas spending, so it's hardly best advice for them to divert money from that, towards saving up for Christmas 2006.

Let's face it, deep down inside, we know we're going to splurge this year, just as we have in previous years. If you've saved up for it, great; if you can afford to pay your bills out of your monthly income, lucky you. But if you haven't got savings, and your Christmas spending looks set to outstrip your December and January wages, you're going to be borrowing.

That means one of three things: credit cards; overdraft; or www.moneysupermarket.com shows that someone who spent £500 on their Burton store card, and paid it off over the next 12 months, would pay £120.29 in interest. If instead they spent the same amount on the Sainsburys Visa credit card, which has 10 months interest free on purchases, they would pay just £9.06 interest over the year, saving £111.23.

Which brings me neatly to credit card rule number two: Find the lowest rate you can, and go for an interest-free card if you can get it.

Over 25 credit cards are currently offering 0 per cent on purchases for introductory periods. The best of them, according to Moneysupermarket, are the Sainsburys Bank Visa card, with 0 per cent on all purchases for 10 months; the Mint Classic Mastercard, where all purchases are interest-free until September 1, 2006; and the Nationwide Building Society Classic Visa, the Lloyds TSB Platinum card, and the HSBC credit card, all offering nine months worth of interest-free purchases. Shoppers who apply for one of these cards should get them in plenty of time for Christmas, but if you want to start spending now, you could apply for a card with 0 per cent on balance transfers, such as the Amazon.co.uk credit card, which offers 0 per cent for six months on both purchases and balance transfers.

That way you can put your early Christmas shopping on your existing card, and then transfer the balance to the 0 per cent card when it arrives.
Remember to make a note of when the interest-free period ends, and make sure you pay off the balance by then, or move it to another 0 per cent balance transfer deal.

Overdraft

Many shoppers drift into overdraft in the run up to Christmas, without planning in advance. But unauthorised overdraft rates are much heftier than those you have pre-arranged, so it makes sense to contact your bank if you think you are about to dip into the red. Alliance & Leicester's Premier and Premier Direct current accounts even have interest-free authorised overdrafts for the first 12 months after opening the account.

So, check what your bank's authorised overdraft rates are, and arrange one if necessary. Generally, however, you're better off applying for a 0 per cent credit card and doing your spending on that, than you are paying overdraft interest.

Personal loans

Loans are often touted around in the run up to Christmas, but there is no such thing as a 0 per cent personal loan, so again, most people will be better off doing their spending on a zero per cent credit card, as long as they pay it off within the introductory period.

One advantage of loans, however, is that they have structured repayments, which can mean that if you lack discipline you are more likely to pay off a loan than a credit card debt. One of the best loan rates available for those borrowing small amounts over short periods is from Cahoot, which charges borrowers with a good credit rating 6.9 per cent, and allows them borrow as little as £100 and to repay over any period from one month to five years. The lowest rate available, again for borrowers with a good credit rating, is Northern Rock, with an interest rate of 5.7 per cent for amounts over £1,000 and paid off over 12 months or more.