How to get over the Christmas financial hangover

Every year millions of us overspend at Christmas time as parties, presents, food, drink and increasingly holidays eat into our hard-earned cash.

But after the turkey is eaten and the decorations are put back in the attic the consequences of all that spending can linger on far longer.

The trouble with festive debt is that most of it is carried by overdrafts and credit cards, which are useful forms of short-term borrowing but become expensive very quickly if they are not paid off.

And the sheer cost of Christmas means that if you over-indulge on credit and debit cards you are less likely than usual to be able to pay off your debts quickly.

As many as one Briton in five paid for Christmas on their credit cards this year, a study by Maritz Research shows.

And with the majority of credit card holders (52 per cent) being offered a credit-limit increase, and 24 per cent taking advantage of this offer, Christmas credit card debts could be higher than ever.

Data from Sainsbury's Bank shows one person in five does not manage to clear their debt in January, with more than 150,000 Britons taking more than a year to pay for their Christmas indulgence.

But while carrying expensive credit card, store card, and overdrafts can lead to hefty interest payments, debt consolidation loans and credit cards offering zero per cent interest on balance transfers can save you money.

For consumers with debts on credit or store cards, in particular those who often pay no more than the minimum repayment due, an interest-free balance transfer is an attractive way of saving money on interest repayments.

Balance transfers are great as long as you can clear your debt before the interest-free period runs out. While increasingly credit card providers are charging a fee for balance transfers, a two per cent charge on a £2,000 debt is just £40 - considerably less than the interest that would be charged over a year.

However, getting good value from a credit card balance transfer means having the discipline to pay off the full amount in the time specified and not spending on your new card in the interim.

If you want more structure in the way you pay off your debt, along with cheaper monthly payments, a debt consolidation loan can prove the better option.

And there are considerable savings to be made.

If you have £1,227 on a credit card, £2,658 on a loan and an overdraft balance of £401 interest payments alone over a year cost £296, figures from uSwitch.com show.

However, if you take out a debt consolidation loan to repay this amount over a year you can save of up to £163.

"If consumers are careful about managing their spending, a debt consolidation loan can help by reducing monthly payments, improve credit ratings and if debts are with store or credit cards that have a high interest rate, can result in less interest repayments than on a debt with a loan," said Nick White, director of personal finance uSwitch.com.

But while there are considerable advantages to putting all credit card, overdraft, and store card debts in one place - there are also problems.

"Consumers need to understand that taking out a loan isn’t just a quick fix solution to ease their debt problems and that they shouldn’t go on using their other forms of credit," Mr White added.

"Someone taking out a loan should only look to apply for an amount that covers all their debts and no more – nearly one in five consumers we surveyed admitted to taking out a higher loan than needed, with 40 per cent of them doing so in order that they had a bit extra for a rainy day."

There were also warnings about the true effectiveness of debt consolidation loans in the long term.

David Kuo, head of personal finance at The Motley Fool (Fool.co.uk) told MyFinances: "Rolling up all your small outstanding debts, overdrafts and credit card bills into one big loan doesn’t really make things better.

"It just seems better because consolidation loans generally have low interest rates, which means lower monthly interest payments.

"But since payments are usually dragged out over many years you’ll end up paying a fortune in interest payments."

However, those willing to take debt reduction seriously can use debt consolidation loans effectively.

If the loan is repaid quickly, and the habits that led you into debt in the first place are tackled, debt consolidation loans can prove cheaper.

"Bear in mind that merging your debts into a single loan only works if you tackle the underlying reason why you fell into debt in the first place," Mr Kuo added.

"Consolidating your debt and then continuing with your bad money habits will just lead to more financial problems."

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