Cards that swipe back

The Christmas spending binge is well under way and much of it will be paid for on credit cards.

UK card holders spent a staggering £8.4 billion on their credit cards last December and £8.7bn with debit cards. The Credit Card Research Group predicts that this year credit card spending will swell to £9.2bn while debit cards will rack up £10.3bn. A study by card operator Capital One says £7.28bn will be blown on credit cards this Christmas - an average of £280 per holder.

Capital One says that a lit tle over half of card customers expect to spend the same as last year, but 26 per cent expect to spend a little more. A quarter plan to spend less.

More than half this spree will go on presents, followed by food and drink, which will take 16 per cent of the total. Six per cent will go on clothes, 5 per cent on travel and 4 per cent on partying.

Separate research suggests that many card users will pay vastly more than necessary for their Christmas borrowing. They will use expensive credit cards and be stung by unexpected charges if they take loans to try to straighten out their finances in the new year.

The National Association of Citizens Advice Bureaux (Nacab) estimates that UK borrowers are paying £4bn a year too much for credit because of traps lenders lay to increase their profits. These include:

· Reduced minimum payments on credit cards, which can lead to much higher final bills.

· The high cost of department store credit cards.

· Interest-free loan deals that sting borrowers with high penalty payments if they are even a day late settling their bills

· Payment holidays, which allow interest to roll up, adding to the cost of the loan.

· Unsuitable and costly insurance for loans.

Nacab says UK consumers are financially illiterate, and is calling for government and industry initiatives to teach them to understand financial products.

This lack of financial acumen is a problem in pensions and insurance too, but Nacab says the huge growth in consumer lending has made borrowers particularly vulnerable. In 1979, outstanding non-mortgage consumer credit was £10.5bn. By last June it had reached nearly £132bn.

Many of the problems relate to loans not marketed on the high street, such as for mail order, or involve fringe brokers and other lenders.

But Nacab identifies shortcomings with high street credit, particularly store cards, and with conventional credit cards.

The report highlights the way card companies have cut the minimum borrowers must repay each month.This can lead to a huge cost. If a borrower owes £2,000 on a card with an 18 per cent interest rate and a minimum monthly payment of 5 per cent of the outstanding debt, it will take 7.3 years to pay it off. Interest will total £811.

Reducing the minimum to 3 per cent means repayment takes 13.8 years - and the interest rises to £1,799.

Allowing borrowers to take 'payment holidays' - where no monthly payment is required but the interest keeps being added - can raise your final bill. In the same example, adding in a once-yearly payment holiday to a 3 per cent minimum payment lengthens repayment of the debt to 16.3 years. Interest will now be £2,174.

There are many examples of popular high street credit agreements that any financially literate consumer would avoid.

Nacab says most borrowers using store cards that charge 30 per cent would be able to get overdrafts, loans or credit cards at much lower rates elsewhere. 'It therefore makes no sense for consumers to take any form of extended credit on high- interest credit cards,' the report says.

With an estimated 20 million store cards in use in the UK, the costs could be huge because 38 per cent of credit card holders do not pay their bills in full each month.

'Financial services companies can take advantage of financial illiteracy by offering product innovation that seems to offer advantages but actually only serves to increase the profitability of a credit product,' says Nacab.

While many borrowers may pay over the odds because they do not understand the pitfalls of their loans or cards, many others may simply be apathetic about seeking a better deal.

The card market, in particular, is now highly competitive and while there are traps for the unwary, those who get it right can borrow cheaply, or even for free.

Yet card operator Morgan Stanley Dean Witter points out that 90 per cent of people have no intention of changing their card provider. One of its surveys showed borrowers are at least vaguely aware that a high street bank may not be the best source of credit: 35 per cent would change to a specialist card provider if they switched - twice as many as would go to a high street bank for a card.