Avoid a financial hangover this Christmas

Enjoy the festivities but don't give yourself a major money headache in 2010...

It's Christmas and that means it's time to party! But it is also the most expensive time of the year and no matter how good our intentions, many of us end up without enough money to fund the festivities in the way we really want to.

Whatever your weakness, Christmas costs can add up. Perhaps you just love to spoil family and friends with presents, or maybe you'd rather spoil yourself with fine food and wine.

Either way, if you are not careful you could start the New Year under a mountain of debt that feels insurmountable.

Below are some of the most common mistakes people make at Christmas when it comes to managing their money. Avoid them at all costs.

Don't over-indulge

The first and most obvious tip is not to over-indulge. It's great to buy tonnes of presents for the kids or friends, but the most expensive gifts are really not always the best. Plus people understand that if you are short of cash this year the presents won't be extravagant.

It's the same with food. Don't buy a turkey big enough to feed a family of 10 if there are only four of you sitting round the dinner table. And you don't need a collection of new party outfits -- a little black dress is a little black dress whether you bought it this season or in 1999. The same goes for gents -- although not (necessarily) with dresses!

If you are throwing a Christmas bash remember you can be generous without being over-generous. Ask guests to bring their own booze and say you'll provide the food.

Make something cheap like a huge chilli to feed the party goers (or read our Frugal Recipes for some top tips), or go for old-fashioned turkey sandwiches. Remember, people go to Christmas parties for a good time, not for a fancy gourmet experience.

Now for the finance...

Don't linger on a crummy credit card

If you are funding some of the festivities on your plastic make sure you are not paying over the odds on your borrowing. For example, if you are paying your lender's APR, typically around 17%, your debt could soon increase, especially if you spend a lot on your credit card before or during Christmas.

You have two options. You could get hold of a 0% new purchase card and do your Christmas shopping on that. That way you will get interest-free credit on everything you purchase on your card for up to a year, depending on the deal. The Tesco Clubcard Credit Card, for example, offers an interest-free period on purchases for 12 months.

If you think you won't have time to apply for and receive a card (and you might be right) there is another option.

Do all of your Christmas shopping on your existing card, but in the meantime apply for a 0% balance transfer deal as well. That way you'll be able to transfer your existing debt over to the new credit card and benefit from interest-free credit for a year or more.

The Virgin Credit Card, for example, offers an interest-free period on balance transfers for an impressive 16 months. You could save hundreds of pounds with this simple switch.

Don't be tempted by store cards

How many times have you been offered 10% off a purchase at the till if you take out a store card?

Don't be tempted to go for it unless you are extremely financially disciplined. If you are willing to pay off the debt when the first invoice arrives and then cut up the card immediately and cancel the account it might be worth it.

Otherwise steer clear.

Store cards are renowned for their extortionate interest rates -- as high as 29% -- and for being doled out to people who can't afford to borrow. A recent undercover investigation by Which? Money saw an indebted graduate handed £2,750 of credit on the high street, despite earning less than £1,000 this year.

To find out more about store cards read Why the worst credit cards just got worse.

Don't go over the top on your overdraft

Overdrafts can be real life savers at the end of the month when you just need a bit to tide you over until payday. And as long as you have a pre-arranged facility you can slip into the red now and again without having to arrange to borrow and without any fuss.

In fact, many current accounts offer an automatic interest-free buffer so you can do this without it costing a penny. First Direct's 1st Account comes with a £250 interest-free buffer for example.

But the problem with Christmas is that we sometimes do more than slip into our overdraft. If you know you need to borrow more than a few hundred pounds, or more than you can pay off by the end of next month, an overdraft is probably not the cheapest way to borrow.

With overdraft rates ranging from zero to upwards of 20%, they can be extremely expensive and you could be better off using your credit card -- providing you have a good deal.

That said, there are some great current accounts specifically for those who are overdrawn and if you have one of these your overdraft could well be your cheapest borrowing option.

The Alliance & Leicester Premier Direct Current Account, for example, offers an interest-free overdraft for the first 12 months - after that it charges 50p a day up to a maximum charge of £5 a month. Just be warned you'll need to pay at least £500 into your account each month.

Don't forget to save next year

Finally, don't forget that the best way to pay for Christmas is to save for it. Admittedly the last thing you probably want to do in the New Year is start squirreling away money for the next festive season, but it will make your life so much easier next December.

Instant-access accounts suit most people because they allow you to get hold of your money whenever you need it. So if you see the perfect present for somebody in the summer you can get your hands on your cash to buy it there and then.

Find out more about instant access savings accounts in Earn up to 8% on your savings.

Most importantly, remember that while nobody wants to be a Scrooge at Christmas, a little careful planning, some clever financial management, and a dash of restraint will ensure you have a great Christmas that doesn't lump you with a financial headache in January.

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