Costly credit could inflate Christmas spend by 52%

With cheap credit becoming increasingly hard to find, Christmas shoppers could be forced to resort to expensive alternatives.

Store cards, credit card cheques, credit card cash withdrawals and sub-prime deals are all heavily marketed at this time of year to lure in cash strapped shoppers.

New research from uSwitch.com reveals than some consumers could be forced to inflate their Christmas spend by 52% due to the extortionate interest rates charged on this type of credit. The average Christmas spend is expected to be £604 this Christmas - this could be bumped up by £312 to just under £1,000 on costly credit.

Five ways not to pay for Christmas:

1. Ex-STORE-tionate

There are almost 16 million store cards in issue in the UK today which carry an outstanding balance of over £2 billion. Research from uSwitch.com reveals that using store cards for shopping this Christmas could cost consumers £1.9 billion in interest in the next year alone. The average APR is 25.03% compared to the average credit card APR of just 17.05% which means store card users could pay £1.4 billion more (47%) in interest charges.

2. Minimum repayments

Making the minimum repayments each month on Christmas debt is not a good idea. For example, the predicted £604 Christmas spend on an Argos store card at 27.9% APR will take 9 years and 4 months to pay off if the average minimum repayment is made each month (4.13%). A total of £534.88 will be paid in interest alone.

3. Cash withdrawals on credit cards

Research from uSwitch.com also reveals the emergence of a worrying trend whereby consumers, desperate to get their hands on cash, are withdrawing cash on their credit cards to fund the festivities. Despite carrying APR's of up to 32% (average 29.97%), almost double the average purchase APR of 17.05%, 1.7 million people are planning to fund the first credit crunch Christmas by withdrawing cash on their credit card. More worryingly, 69% of consumers who use this facility do not know how much it costs, and a further 12% believe it is no different to a debit card withdrawal.

4. Credit card cheques

Similarly, the number of people using credit card cheques as a ‘quick-fix solution' to accessing cash is on the increase. With an average value of £1,141 (an increase of £165 in the last year) consumers have spent a total of £3.6 billion in the last year alone using these cheques. Again, 1.5 million (86%) consumers do not understand the associated fees and the financial implications of using these cheques. Costing 26.7% APR, fees and interest charges applied to these cheques actually generate more than £571 million for the credit card industry.

5. Sub-prime store credit

The credit market has also seen the emergence of retail affiliated cards and gift vouchers marketed as ‘a great gift for family and friends'. However consumers need to treat these deals with extreme caution. Provident Personal Credit (in association with trusted high street brand Argos) is offering shoppers the ‘Easy Shop card. Cash strapped consumers who don't have the money to buy gifts at the store this Christmas can borrow between £100-£500 and spread the cost over the next six months at a massive 222.7% APR. A consumer using the card to fund £500 worth of purchases can expect to pay back £675 in just six months - £175 in interest.

Provident Personal Credit also sell ‘sub-prime' gift vouchers, carrying an inflated APR of up to 222.7%. These vouchers can be redeemed in Argos and 96 other major high street retailers such as Woolworths, B&Q, JJB, Topshop, Topman, Burton, Mothercare, Comet, HMV, Halfords, Debenhams, and House of Fraser.

For those borrowers who are in a position to pay their credit card balance in full each month, a card that rewards while you spend such as a cashback or a loyalty credit card may be the best option. For example the AMEX Platinum cashback card offers an introductory 5% rate for an initial 3 month period for purchases up to £4,000.

Louise Bond, Personal Finance Expert at uSwitch.com concluded: "There are tough times ahead in 2009 as consumers begin to feel the full impact of recession. In light of this, Christmas 2008 will undoubtedly be on a tight budget. uSwitch.com urges shoppers to ensure that whilst being mindful of the amount they spend, the way in which they spend it deserves equal discipline.

"The worst thing to do is rack up debt on ‘easy' credit which carries an extortionate APR. There are a number of competitive 0% credit card offers in the market and consumers need to shop around for the best deals. People must be able to repay the debt accrued over the Christmas period in the most economical way possible."