The worst ways to pay for Christmas

There are some good ways to pay for Christmas, and there are some very bad ways.

Ideally, the best way to pay for Christmas presents and other seasonal spending is to save up over the course of a year in a top-paying savings account. However, once again this festive season millions of people say they are going to put Christmas on credit.

If that's you, it's vital you carefully pick the right form of credit to use, because borrowing without doing your homework first can end up costing you a fortune in interest and charges. For instance, here are three kinds of credit you should avoid this (and every) festive season...

1. Payday loans and doorstep lending

According to the Money Advice Service, around 1.2 million people are considering taking out a payday loan to help cover costs this Christmas. That's a truly terrifying thought.

On the surface, a short-term payday loan sounds fairly simple. You apply for some money, and it can be in your bank account in minutes.

However, if you borrow £250 today from Wonga, you'll pay back £332.15 a month later. In other words, you pay interest and fees totalling £82.51 on a month-long loan.

No wonder payday lenders have been described by Labour MP Stella Creasy as 'legal loan sharks' that prey on hard-up British families and low-income individuals. Research has shown that up to a third of borrowers who take out payday loans can't repay them, leading to hassle from debt collectors.

If you need a small short-term loan, why not turn to friends and family before shelling out loads in interest and fees on a payday loan?

2. Unauthorised overdrafts

It may come as a surprise to learn that, despite being a mainstream credit product, unauthorised overdrafts can be just as expensive as payday loans. In addition, the interest and penalty fees levied on unauthorised overdrafts can be many times the cost of borrowing on a typical credit card.

If you go into the red and your balance falls below zero without your bank's permission, then expect to pay interest rates of between 20% and 35% APR. However, many banks will also hit you with penalty charges, which usually apply per transaction or per day.

In some cases, these can exceed £30 for each 'bounced' (rejected) or processed payment or a daily fee of £10.

Indeed, overdraft penalties are so sky high that British banks rake in more than £2 billion a year from these penalty fines. This makes slipping into the red one of the banks' most lucrative markets.

If you think you are in danger of going overdrawn, call your bank or building society before it's too late.

You could also potentially switch your current account to one that offers an authorised overdraft to give you some breathing space.

Nationwide's FlexDirect account offers a 12-month fee-free overdraft, although how big an overdraft you'll be offered depends on your credit rating.

Compare current accounts with overdrafts

3. Store cards

Store cards are among Britain's worst retail rip-offs, as they are consistently and reliably more expensive to use than conventional credit cards if you don't pay them off in full each month.

The average APR is typically around the 29% mark, far higher than the average credit card APR of 19%.

With rates these high, you'd be mad to borrow on store cards instead of using a low-rate credit card, particularly if there are no freebies or incentive to take out a store card. Even better, if you have a decent credit rating you could enjoy up to 17 months of interest-free credit with a 0% on new purchases credit card.

Why pay interest when you can dodge it for over a year and a half? You can also earn reward points with the Tesco Clubcard credit card for Purchases, the Sainsbury's Bank Nectar credit card and the M&S credit card.

Compare 0% purchase credit cards

This is a classic lovemoney article that has been updated

More on money and Christmas:

The best Secret Santa gifts

Twelve good, cheap Christmas gift ideas

Where to get the cheapest Christmas lunch

Why gift vouchers and cards make bad Christmas presents