Some 18% of us will be putting our Christmas purchases on a credit card this year, according to recent research by credit experts Experian.
This article was first sent to Fools in our 'Afternoon' email series.
A bit of research could mean the difference between some nice free cashback and a whopping interest bill in the New Year!
If you pay your balance off in full
If you're able to pay your balance off - in full - every month, you could actually earn money by spending on a cashback credit card.
The market leader at the moment is the American Express Platinum card, which gives a whopping 5% cashback on purchases in your first three months (up to £4,000 of spend).
Afterwards, the cashback rate drops to 0.5% on the first £3,500, 1% on £3,501 to £10,000, and 1.5% after £10,001. So - grab the card now, use it for all your spending and get 5% cashback on everything until January.
Just remember that some businesses still don't accept American Express. And if you can't pay your balance off every month, this card isn't for you. The interest you'll be charged will vastly outweigh the cashback benefits.
If you're in debt
If you're thinking of getting into debt to pay for Christmas this year, the best advice is: DON'T. You'll be living above your means and your New Year will come with a heap of debt attached.
However, if you're determined to put Christmas on credit, some cards will cause you less financial heartache than others. This is where 0% on purchase cards come in.
The best 0% purchase deals
With a 0% on purchases card, you won't pay any interest on purchases you make with the card for the length of the period specified.
So - provided you pay the balance off before the 0% period ends - these cards can help you avoid the hefty interest bills attached to other forms of credit.
Here's my summary of the best 0% purchase cards currently on the market:
Card | 0% new purchases period | 0% balance transfer period | Usual APR |
Ten months | Ten months (3% fee applies) | 15.9% | |
Marks & Spencer | Ten months | Six months (2% fee applies) | 15.9% |
Barclaycard Platinum with Purchase and Long Term Balance Transfer | Ten months | N/A - 6.5% on balance transfers until paid in full | 16.9% |
These cards offer the longest 0% purchase periods on the market - with all deals running until September 2009.
My favourite is the Halifax All In One card, because it also offers a ten month 0% balance transfer deal.
If you're paying interest on credit card debt at the moment, it may well be worth shifting this debt to the Halifax card as well, to get rid of those extra payments. Just remember that you'll pay a 3% fee for the privilege.
Don't go spending mad!
Whichever card you choose, start paying back your debt as soon as you possibly can, so you don't end up being charged interest of 16-17% APR when the deal ends.
And don't rely on being able to shift your balance to another 0% card when your offer ends. In the current climate credit is becoming much harder to come by, and there's no guarantee you'll be accepted for one.
As my Foolish colleague Cliff D'Arcy explains in this article, card charges and fees are creeping up, so you could be shelling out a lot more for the privilege of switching in 2009.
Finally, remember to set up a direct debit for the minimum monthly payment on the card as soon as you receive it. If you forget, you'll be accused of non-payment by your card provider and your 0% deal is likely to be whisked away from you.
Long-term alternatives
If you're determined to spend on a credit card - but you don't think you'll be able to pay it off within ten months - there are a few longer-term alternatives.
The latest version of the Capital One Platinum card, for example, offers you a relatively low, fixed APR of 8.5% guaranteed until August 1st 2012. This offer applies to both new purchases and balance transfers - and there's no balance transfer fee.
This may help take the pressure off as it allows you to spread repayments over a longer period of time. However, you'll still be paying interest, and your debt problem won't have gone away!
Check your credit score
Unfortunately, you'll need a pretty spotless credit rating to be accepted for some of the cards mentioned here.
A failed application can itself damage your rating, so before you choose a card, find out what your credit score is to see if you've got a decent chance of success.
You can check your credit status for free with Experian.
In a nutshell, be careful with your Christmas spending. Flash that plastic now and it could bite you on the bottom later.
A frugal Christmas might even be welcomed by your loved ones. Apart from anything else, it will put them under less pressure to blow their own budgets!
Visit The Fool's Credit Card Centre to help find the right deal for you.