I AM REALLY WORRIED ABOUT PAYING FOR CHRISTMAS – WHAT’S THE BEST WAY TO DO IT?
The best way, if you can be disciplined, is to use a credit card. They are flexible and can be very cheap.
BUT I THOUGHT CREDIT CARDS WERE EXPENSIVE?
Some are. Choose badly and you will pay 20% interest a year on the money you owe. But you can pay 0% - yes zero per cent - interest for the first six months and after that as little as 7%.
SO HOW DO I PAY 0%?
As I write, two banks - egg and Capital One - are offering a six month introductory rate of 0% on their credit card. That means you can take out the card in December, buy your presents (and maybe something for yourself!) and as long as you pay the debt off with the June 2001 statement you will have paid no interest on that loan at all. But remember that taking out cash is NOT interest free. And if you are late with a payment there may be penalties to pay.
WOW. WHAT HAPPENS AFTER THE SIX MONTHS?
The rate will rise – to 11.9% for egg and to 12.9% for Capital One. So for each £1000 of debt you would pay £129 over the year with Capital One and £119 with egg. But remember you can borrow interest-free on most credit cards as long as you pay the bill off in full by the due date. Four out of ten credit card holders do just that. Egg offers you a maximum 45 days to pay it off; Capital One offers 56 days. But beware, some cards do not offer any interest free period. So if you want to pay the bill in full each time, avoid them.
WHAT IF I CAN’T PAY MY DEBT OFF BY THE END OF THE SIX MONTHS?
Change cards again! Get another low introductory rate. But if all that is too much trouble, why not just go for a good, low permanent rate now. Currently one of the best deals is cahoot from Abbey National. It offers a rate as low as 7% if you have a good credit rating, though if you don’t it could be as high as 11%. So you could pay as little as £70 a year for each £1000 of debt – that’s less than many people pay on their mortgage.
SO IF I TAKE OUT A NEW CARD WHAT DO I DO WITH THE DEBT ON THE OLD ONE?
Transfer it to another credit card. Most providers will let new customers transfer their debt and charge a low rate of interest on it – either for six months or in some cases until the debt is paid. At the moment the cheapest for six months is also egg which is offering 2.5%. After that the interest rises to 11.9%. So if you are not sure you will pay it all off within six months, NatWest is the best deal - 5.9% for the life of the debt. Remember not to spend anything on this card. Just use it reduce your interest payments on your debt.
ISN’T IT JUST TOO TEMPTING TO HAVE ALL THESE CREDIT CARDS?
It can be. There is always the danger that you will use them to increase your borrowing and get into difficulties rather than managing your debt and paying less for it.
CAN’T I JUST GO OVERDRAWN FOR A FEW MONTHS?
All too easily! But it can be an expensive option. If you do not arrange it in advance, most banks will fine you anything up to £30 and charge you interest on the loan of up to 30%. Some will make a charge every time you write a cheque or make a payment which increases your overdraft. So if you want an overdraft, arrange it first.
WHAT WILL IT COST THEN?
It depends on your bank. Barclays for example will still charge you £5 a month AND nearly 19% interest. But cahoot charges just 9% with no monthly fee.
WHAT ABOUT A LOAN?
Bank loans are inflexible and usually quite expensive for small amounts – but they do impose discipline on you. If you take out a loan to pay for Christmas, borrow over one year – otherwise what are you going to do next Christmas? And think very carefully before you take out the payment insurance. It can double the cost of the loan. The best loan rate at the moment is from IF, the Halifax internet bank. You can borrow £1000 over a year at 10.5%, costing you just £55.16 altogether in interest.
WebWatch
25 November 2000
e-mail Paul Lewis on paul@paullewis.co.uk