BETTER BORROWING

It is not just the winter weather that can send icy shivers down our spines. Debt follows Christmas as surely as New Year does. However hard you try, the cost of Christmas for the kids always seems that bit more than you can afford. Getting into debt has never been so easy. But it can also be very cheap.

Flexible friends
Credit cards are completely flexible – you can pay what you can afford when you can afford it. And they can be very cheap, despite the advice of the man in charge of Barclays Bank. Matt Barrett told a Parliamentary committee in October that he never used Barclaycard for borrowing because it was "too expensive". He was right – credit cards are an expensive way to borrow over the long-term. Especially Barclaycard which charges some customers as much as 24.9% on the money they owe.

But for short-term debt, plastic can be the cheapest way to manage your money. In fact it can be free. More than 30 cards offer new customers free borrowing for six months – though you can find up to nine months if you look around. So with one of these cards, you can spend for Christmas or at the New Year sales and borrow the money free until the summer. Once you’ve finished your binge, divide the total by six and pay that much off each month. At the end of the time your debt is cleared and you have paid no interest at all. If you think you might borrow in the future, cahoot charges just 8% and intelligent finance 8.9%.

If you have already done your Christmas shopping, do not worry. Many cards let new customers transfer a balance from another card or even from a loan or overdraft – and again charge you nothing for the debt for six months. But beware. Some cards offer free balance transfers but not free spending. If you use the card to buy stuff you will end up paying interest on some of your debt. So get two new cards – one that is interest free for spending and another that is interest free for transferred debts. And remember the total has to be paid off within six months or you can be clobbered with high rates of interest.

Enthusiastic credit card advice

Overdrafts
Another very flexible form of borrowing is an overdraft. Use it for very short term debts – like the shoes you must have two days before your salary goes in. The best rate for an agreed overdraft is Nationwide with 6.75% or cahoot with 8%. And with cahoot the first £250 overdraft is free of interest and no fees are charged. If you are a bit of an overdraft user, then move your current account to one of those banks. If you have no overdraft facility, or you go over the limit the bank sets, you can be clobbered with interest at 30% or more on the debt – not to mention a fee for an automatic warning letter. So never go overdrawn without agreement.

Sober bank information

Loans
For longer-term debt a bank loan can be good value. You can borrow from £1000 to £25,000 for anything between 1 and 10 years with Northern Rock for just 6% a year. Others may seem to be close to this rate. But the headline rates they offer are not for small amounts or short periods.

Loans are not flexible. You must keep them for the agreed period and make the repayments on time. If you try to pay them off early there will be a penalty They also try to make more out of you by selling you insurance to cover the interest if you are sick or lose your job and cannot pay it. Insurance can cost you more than the interest you pay and people who try to claim on it are often disappointed. Think very carefully before you buy it.

Comprehensive loan comparisons

Consolidation
Don’t be tempted by those friendly companies advertising cheap ways to get out of debt. They can turn a short-term problem into a long-term disaster. Consolidating your debts normally means you spread the debt over many more years, pay more interest, and usually have to put your home at risk. They can turn a generous Christmas into homelessness.

Credit checks
There can be many reasons why you may be refused credit. You are assessed by a computer and certain things trigger alarm bells – even not having had much debt in the past. Credit files are kept by two agencies – Equifax and Experian. You can get a copy of your record for just £2. And if there is something wrong they will put it right.

You can do it online at www.experian.co.uk or www.equifax.co.uk

Timeliness
If cleanliness is next to godliness, then timeliness is next to wealthiness. Always pay your credit card bill on time – or you may get a £25 charge. Never go overdrawn without permission – another £25. Make sure your debt is paid off when your six months interest free credit runs out. Or get clobbered.

Help
Sometimes debts can get the better of us. Rule 1 – don’t panic. Help is at hand.

Consumer Credit Counselling Service 0800 138 1111

National Debtline 0808 808 4000

Or contact your local citizen’s advice bureau.

January 2004

e-mail Paul Lewis on paul@paullewis.co.uk