Avoid a financial hangover in 2011

Despite warnings about the tough economic times ahead, spending this Christmas is set to be higher than last year. Spend and borrow with care in what’s left of 2010 before VAT and inflation rocket in 2011
Despite warnings about the tough economic times ahead, spending on food, drink and gifts this Christmas is set to hit £37 billion, according to Deloitte - more than last year. Our money expert shows us how to spend and borrow with care in what’s left of 2010 before VAT and inflation rocket in 2011.

Despite all the warnings about the tough economic times ahead, spending on food, drink, and presents this Christmas is set to hit £37 billion - that’s a full one per cent more than last year, according to experts at financial advisers Deloitte.

The firm’s poll of 2000 British consumers found that 71 per cent plan to match or increase last year’s spending on gifts; more than three quarters plan to do the same on food and drink, while 79 per cent will up their spending on entertainment and leisure.

That’s all very nice for shops but dangerous for shoppers. The VAT rise to 20 per cent kicks in next January, and the Governor of the Bank of England, Mervyn King, has warned that inflationary pressures will inevitably mean the cost of living will soar.

With this bleak prospect it is essential to avoid being saddled with a debt you’ll still be paying off next Christmas. It’s far better to cut back now rather than go into the red just for Christmas. If you must borrow, borrow the most sensible way.

Apply for a credit card that charges no interest on new purchases
Tesco’s Clubcard MasterCard is a best buy, offering 13 months interest-free on purchases. It also offers rewards, paying one Clubcard point for every £4 spend. Other deals comes from Sainsbury’s (whose credit card offers 12 months interest-free), and Halifax, M&S Money and AA - all 10 months.

Golden rule number one: make sure you set up a direct debit for the minimum monthly repayment, because if you miss one, you lose the entire 0 per cent deal.

Golden rule number two: is to ensure you pay off the full balance on your credit card at least one month before the end of the deal to avoid extra charges. On the Tesco card, interest is charged at a hefty 16.9 per cent when the free period ends.

However, if you can afford to pay off your credit card in full each month, go for one that rewards your spending. American Express’s Platinum cashback credit card pays back five per cent on purchases made in the first three months, up to £2,000, then reverts to paying 0.5 per cent for annual spending up to £3,500, or slightly more for higher spending levels. It’s only available to those with an excellent credit rating, however.

If you mainly shop in a particular store, check whether it has its own reward credit card. These tend to be an expensive way to borrow, but can be generous with cash-back as long as you always pay back the balance.

The BHS credit card, for example, pays five per cent back for shopping in-store, and one per cent on spending elsewhere. The MasterCard from Amazon.co.uk - which offers interest-free purchases for the first nine months - credits accounts with £10 if users make a £25 purchase in the first two months.

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