The festivities are over, all the food has been eaten, presents exchanged, and you will probably have already taken your Christmas decorations down. But for many people, the lasting legacy of Christmas isn’t just a few extra pounds around the midriff, but a lot of extra pounds in debt. If you are one of the people who had a splurge on the credit cards to fund the festive season, then you will need to look at how you can reduce your debt hangover to a minimum.
Interest rates have gone up considerably in the past 12-18 months as the Bank of England raised the base rate to bring inflation under control. While that measure has been successful – inflation was at a surprisingly low 3.9% in November, having fallen more than expected – these rate rises have resulted in much more expensive borrowing than people have been used to. So, any spending on credit cards will now be more expensive to service if you’re not able to pay it off within the short period where you’re not charged interest on the cards.
This means you could be spending more on interest than you expect, which increases costs and, potentially, means you will take longer to pay off these debts. But there are several things you can do to reduce the impact this debt hangover will have on you.
Reduce credit card debts ASAP
If you have used credit cards to buy some of your gifts or other Christmas goodies this year, then you will be paying more in interest than you would have last year, according to data from UK Finance. In December 2022, the average credit card interest rate was 17.86%. This year, it has risen past 23% to reach the highest level in 30 years.
As such, reducing the amount you are paying on your credit card interest is a priority as we move into January. You will typically get around 56 days after a purchase where your card supplier won’t charge you interest, so if you are able to pay off that balance within this time, you won’t face any additional interest charges.
However, after this, you will start to pay interest on the balance, and it can become painful. Every card will give you a minimum balance that you need to pay each month, but if you are able to pay significantly more than this, then you will reduce your debt much more quickly. If not, then you could face long and drawn-out debt payments.
The other problem with credit card debt is that if you pay the minimum amount the bank asks for each month, it will take much longer to repay the amount you owe. This is because the interest due on the balance is cleared first, and then any additional money from the payment you have made is used to reduce the balance itself. This means you could be paying less than you think on the balance outstanding. So, you should pay off as much as you can each month without putting your wider finances under stress.
Could you switch to a 0% balance transfer card?
There is another way to reduce the amount of interest you pay on your credit card debt, and that’s by switching the debt to a card which is offering 0% on balance transfers. These offers typically last for between 12 and 18 months, and you would need to have a decent credit rating to be able to access them.
At the time of writing, the best 0% balance transfer deal on offer was with M&S Bank Credit Card Transfer Plus Offer Mastercard, which is offering a 0% balance transfer for 28 months, according to Moneyfactscompare.co.uk. There is a balance transfer fee of 3.49%, or £5, whichever is greater, which you would also need to bear in mind.
If you had a £5,000 debt that was transferred to this card and you paid £185 per month, then you would pay off the entire debt within that 28-month period without incurring any interest, according to calculations from Moneyfactscompare.co.uk.
This is one of the best ways to keep your credit card debt interest-free if you can. If you’re not sure whether your credit rating is good enough to qualify for these deals, then you can check with one of the credit ratings agencies, such as ClearScore or Experian. Some comparison websites will also do a ‘soft’ credit check for you which doesn’t leave a footprint on your credit record. This is important, as if you apply for a few credit cards in succession and you are turned down, then it will negatively impact your credit score.
Don’t use a balance transfer card for new purchases
One thing not to do is use a 0% balance transfer card to pay for new purchases, as these will face interest charges, and can impact how quickly your original debt is reduced. Most banks will apply the payments you make to the debt that is being charged at the highest rate of interest first, and if you create a chargeable balance because you buy something else, this will be first to be paid off. Ideally, use another card for this – if you can get a 0% on purchases card, then you will reduce your costs even more.
If you don’t think you will clear your debt before the end of the 0% period, there is nothing stopping you moving any remainder to another 0% card if you wish, but bear in mind you will be charged a balance transfer fee in most cases.
The other option you have, if you think you will need to keep moving your debt or you may not qualify for a 0% card, is to take out a personal loan at a lower rate of interest than your credit card is charging and reduce your costs that way. It can also help to extend your payments over a longer period for a lower interest amount than you would pay your credit card company.
Your payments will be fixed, so you know how much will have to go out each month, and you will also know exactly when your payments will end, as the loan will have a fixed term. The lowest personal loan rate at the time of writing was with Novuna Personal Finance, which is part of Mitsubishi HC Capital UK, at 7.9% APR. If you had a £5,000 balance and you wanted to pay this over 60 months, you would pay £100.49 per month, according to Moneyfactscompare.co.uk.
If you want to be sure you don’t have a similar Christmas debt hangover next year, then you could look at reducing the amount you spend on the festivities. More than half (57%) of adults in the UK said they reduced their Christmas spending in 2023 by shopping at cheaper supermarkets and limiting the amount they were spending on presents for their friends and family, according to research from the Liberal Democrats. Or you could put away some money each month to build up a Christmas fund for 2024, to limit the amount you need to borrow for the Christmas you really want.
If you are struggling to deal with a Christmas debt, then please get in touch with us and we would be delighted to help you reduce your costs as much as possible.