Get on top of those Christmas debts

It appears as though the credit crunch and warnings of possible house price falls haven't been enough to stop consumers spending.

The latest figures from Apacs, the clearing service, revealed that the UK’s 31.5million credit card holders spent a staggering £32.3billion in the last three months of 2007 – the second-highest quarterly sum on record.

Many analysts had expected households to rein in the spending over the Christmas period as the impact of last year’s interest rate hikes and rising food and energy bills took their toll on family finances. However, there are worrying signs that rather than cutting back, an increasing number of people are relying on credit in order to make ends meet.

If you spent more than you could really afford over the festive season, it is time to nip the temptation to over-spend in the bud and concentrate on repaying your debts before they escalate further.

So what can you do to bring things under control?

There are two main options – take advantage of a 0% credit card offer, or consolidate what you owe on to a personal loan.

The route you decide to take will depend on the size of the debt, how long you think it will take to repay and your own self-discipline.

Credit cards are the cheapest option – a number of providers are offering interest-free periods on balance transfers which last for 12 months or more. You will be charged a transfer fee of up to 3% of the balance, but that should still work out cheaper than going for a personal loan – as long as you can clear the debt before the offer ends, or are prepared to move it over to another 0% card once the interest-free period expires.

Virgin has the longest 0% offer on balance transfers at 15 months giving you a good length of time to pay off your debts. However, the transfer fee is quite high at 2.98%. If you think you can repay what you owe more quickly than that, Capital One’s Platinum card may be a better option. The 0% period only runs until November 1 2008 but the transfer fee is lower than average at 1.7%.

However, using a credit card to repay your debts requires self-discipline. You should work out how much you will have to pay each month in order to clear your balance by the end of the interest-free period and then set up a direct debit for that amount. Also, don’t be tempted to spend any more on your card.

If you do not have the self discipline to do this, a personal loan may be a better option. A loan will also be more suitable if you owe a large amount that will take years, rather than months to repay.

Many providers have increased their loan rates in recent months as a result of the credit crisis, although the best deals start from about 6.6%. However, the rate you will be offered will depend on your credit score.

Moneysupermarket has exclusive access to the lowest secured loan rate in the UK, which is available from First Plus and has an annual percentage rate of 6.6%. The £995 arrangement fee is also waived if you apply through moneysupermarket.com.

This is a secured loan which means that if you are unable to keep up with your repayments the provider has the right to demand the money back from the equity in your house. Secured loans are therefore only available to homeowners.

The other option is an unsecured loan. Moneybackbank, which is owned by Alliance & Leicester, has the best rate currently available at 6.7%. However, these loans are more risky for lenders because they are not secured on your home making it harder for them to reclaim the money if you default on repayments. Therefore, you may struggle to get an unsecured loan if you have a poor credit rating.

If you are unsure about your credit profile you should search for loans using our Smart Search tool to find the deals you are most likely to be accepted for based on your credit score.

Once you have decided the course of action you are going to take to repay your debts, it is important to ensure that you do not run into similar problems again in the future. Therefore, it is also worth taking a careful look at all your monthly outgoings to work out where you can cut back. 

THINK CAREFULLY BEFORE SECURING DEBTS AGAINST YOUR HOME. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.

Disclaimer: Please note that any rates or deals mentioned in this article were available at the time of writing.

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