Money Talk: Best way to keep your Christmas costs down
QUESTION: With Christmas just around the corner, it is likely that I will have to borrow some money to help pay for everything. What is the best way to go about borrowing?
ANSWER: I think your question will be a typical one for many households at this time of year.
One simple answer is to say don't get into debt, but I realise that because of the society we live in, and the pressures placed upon us by the media, advertising and the likes, this is not an option for many.
Despite the rise in interest rates this year, and the fact that the cost of borrowing has risen dramatically compared to this time last year, it is predicted that the population throughout the UK will participate in a spending frenzy in the run-up to Christmas.
According to one recent publication, it has been estimated that over £7,000 a second will be spent on credit and debit cards during Christmas.
In total it has been estimated that over £20bn will be transacted on plastic cards during December.
We should therefore not be surprised to hear that consumer debt problems and counselling have seen a dramatic rise, with the Citizens Advice Bureau reporting an almost 50% rise over the last five years.
Recent stories of individuals owing £72,000 as a result of an original loan of £2,000 taken out 15 years ago should make anyone think twice about how and where they get their credit from.
Places to avoid obtaining credit from include the vast array of store cards which most high street shops offer.
Whilst they are a convenient method for obtaining credit and often offer initial incentives for taking one out, individuals should be aware that any un- cleared balances will attract very high levels of interest, sometimes even double that of normal credit cards.
It is estimated that over 14 million people use this form of credit, but even the Competition Commission has branded them as uncompetitive with rates far higher than they should actually be.
Ordinary credit cards again offer a wide range of interest rates, and if this is a route you choose to go down, make sure you shop around and get the best deal on offer.
Many providers will offer interest-free periods, which means that for a limited period your borrowings will not attract any interest. If timed right you could then pay off any balances, effectively borrowing funds for free.
Loans or overdrafts are another common method of accessing funds you don't currently have.
Again the various banks and building societies offer differing rates and packages so don't naturally assume your existing bank or building society is offering the best deal.
A loan will offer a structured way of repaying the debt over a specific time period, and therefore may not only work out a cheaper alternative than say a credit card, but will also mean that the debt is repaid in a disciplined fashion.
When looking at loans there are two distinct categories: secured and unsecured.
An unsecured loan is a loan that does not require you to have any collateral to secure the loan against. This means that in the event of you being unable to repay it, the lender cannot repossess any of your assets.
A secured loan will mean that you have to offer the lender some sort of collateral, for example your home, which in the event of not being able to meet your obligations could be repossessed by the lender.
So my advice is to firstly think carefully about entering into any sort of credit agreement, and secondly, if no other options are available to you, make sure you find the most appropriate form of credit to suit your needs.
Finally, having worked out the most appropriate vehicle, shop around for the best deal available to you.
Raymond Mulligan is managing director of Johnston Campbell, a company of independent financial advisers regulated by the Financial Services Authority.