There are good ways to pay for Christmas, and there are very bad ways.
Ideally, the best way to pay for Christmas presents and other seasonal expenses is to save over the course of a year in a highest paying savings account. Yet again this holiday season millions of people say they are going to put Christmas on credit.
If this is your case, it is essential that you carefully choose the right form of credit to use, as borrowing without doing your homework first can end up costing you a fortune in interest and fees. For example, here are three types of credit to avoid this (and every) holiday season …
1. Payday loans and home loans
According to the Money Advice Service, around 1.2 million people are considering taking out a payday loan to cover Christmas expenses. It is a truly terrifying thought.
At first glance, a short term payday loan seems simple enough. You are asking for the money, and it can be in your bank account within minutes.
However, if you borrow £ 250 today from Wonga, you’ll pay back £ 332.15 a month later. In other words, you pay interest and fees totaling £ 82.51 on a one month loan.
No wonder payday lenders have been described by Labor MP Stella Creasy as ‘legal loan sharks’ preying on struggling UK families and low-income people. Research has shown that up to a third of borrowers who take out payday loans cannot repay them, leading to hassles for debt collectors.
If you need a small, short-term loan, why not turn to your friends and family before you shell out loads of interest and fees on a payday loan?
2. Unauthorized overdrafts
It may be surprising to learn that, although it is a common credit product, unauthorized overdrafts can be just as expensive as payday loans. Plus, the interest and penalty charges levied on unauthorized overdrafts can be many times the cost of borrowing on a typical credit card.
If you fall into the red and your balance drops below zero without your bank’s permission, expect to pay interest rates between 20% and 35% APR. However, many banks will also impose penalties on you, which usually apply per transaction or per day.
In some cases these can exceed £ 30 for each ‘rejected’ (rejected) or processed payment or a daily charge of £ 10.
Indeed, the overdraft penalties are so high that UK banks are making more than £ 2 billion a year from these fines. This makes sliding into the red one of the most lucrative markets for banks.
If you think you might find yourself overdrawn, call your bank or mortgage company before it’s too late.
You could also potentially switch your checking account to an account that offers an authorized overdraft to give you some breathing space.
Nationwide FlexDirect Account offers a 12-month free overdraft, although the amount of overdraft you will be offered depends on your credit rating.
3. Store cards
Store cards are among the worst retail scams in Britain, as they’re consistently and surely more expensive to use than conventional credit cards if you don’t pay them off in full every month.
The average APR is generally around the 29% mark, much higher than the average credit card APR of 19%.
With rates this high, you’d be crazy to borrow on store cards instead of using a low rate credit card, especially if there are no freebies or incentive to buy a card. of shop. Better yet, if you have a good credit score, you could enjoy up to 17 months of interest-free credit with a 0% on new credit card purchases.
Why pay interest when you can dodge it for over a year and a half? You can also earn reward points with the Tesco Clubcard credit card for purchases, the Sainsbury’s Bank Nectar Credit Card and the M&S Credit Card.
This is a classic lovemoney article that has been updated