Give credit where due, not where it's wasted

The Christmas spending binge is getting into full swing this weekend. If the latest statistics on consumer credit are any indicator, many shoppers will face financial strain in the New Year.

Spending on credit and debit cards is expected to reach £20 billion this month, the equivalent of £7,600 per second, according to trade body the Credit Card Research Group. CCRG estimates that £9.6bn will be spent on credit cards and £10.4bn on debit cards, which take payments directly from bank accounts. Spending on credit cards is forecast to be 9.1 per cent higher than in December 2001 and, on debit cards, 10.9 per cent higher.

Sainsbury's Bank's estimate of credit card spending this Christmas, £11bn, is even higher than CCRG's. Internet bank Egg predicts credit card spending to be about £7bn, with more than a quarter of that, £1.76bn, still unpaid in February. This will cost £21m in interest.

CCRG director Steve Round said consumers were taking advantage of competition in the credit card market to borrow cheaply. 'Common sense should allow cardholders to enjoy Christmas to the full without suffering any subsequent hangover,' he said.

But debt advisers are less confident about consumers' abilities to cope. On average, British adults already owe £3,216 on credit cards, overdrafts and personal loans.

Debt counsellors with the National Association of Citizens Advice Bureaux have seen a 46 per cent rise in the number of consumers with debt problems during the past five years. Over the past year, advisers have taken on more than a million new debt cases. The Department of Trade and Industry released research last week that showed that a quarter of households had experienced financial difficulties in the past 12 months.

David Harker, chief executive of Nacab, said: 'Citizens Advice Bureaux see the distress that debt problems bring; the sleepless nights, the bailiffs at the door, the pressure on family relationships. It is difficult to resist the conclusion that the recent growth in consumer borrowing will lead to problems for a record number of people, who will face far larger debt problems than ever before.'

Nacab is urging borrowers to seek free help, if they get into difficulty in coming months, rather than turning to fee-charging debt advice and debt management companies. The debt management industry - which has grown rapidly in the last five years - has been investigated by the Office of Fair Trading because of concerns regarding charges and the quality of advice.

This resulted in publication of guidelines on how debt managers should operate, but John Lamidey of the Consumer Credit Association said not all were complying. Companies were supposed to make it clear that borrowers' credit records would be damaged by taking out a debt repayment agreements, that lenders were not obliged to reduce payments as a result of intervention by debt managers and that if borrowers paid less, in the short term, to clear debts through debt managers, the long-term costs would be higher.

Debt managers set up repayment arrangements with lenders on behalf of clients, collecting a set amount from the borrower each month and dividing this between creditors. The firms normally charge 15 per cent, plus VAT, on each monthly payment in addition to up-front fees equivalent to the first month's repayment.

Lamidey said there was anecdotal evidence that debt managers were targeting people who are not behind with repayments on loans and cards but may be enticed by claims that monthly payments can be reduced.

People in this position should be particularly careful before signing up with a debt manager because of the risk to their credit ratings. Some managers, he thought, were trying to persuade borrowers to tell their lenders they had lower incomes than they were actually earning.

'If you choose to pay for a service that you can get for nothing, of course you are entitled to do so,' Lamidey said. 'Our concern comes when we see a customer who has gone to a debt manager and then say they didn't know there was a fee.'

Steps in the right direction

· Do look out for cheap credit card deals,
especially to clear existing debts. Several lenders
have 0 per cent deals on offer at present for debt
transfers, lasting varying periods. Try to pay off as
much as possible during the 0 per cent period and
take note what rate will be charged at the end of
the special offer period.

· Don't just pay the minimum amounts on cards
after Christmas. Aim to pay off as much festive
spending as soon as possible in the first two
months of the New Year.

· Do work out a budget. If you can bear to do it
before Christmas, you might save a lot of pain
later.

· Don't pay for debt counselling. Turn to a local
Citizens Advice Bureau, the Consumer Credit
Counselling Service on 0808 138 1111 or National
Debtline on 0808 808 4000.

· Do talk to lenders if you are having difficulties
meeting payments. If you are having difficulty
keeping up your mortgage or are behind with
utility bills, you probably need specialist debt
advice.

· Don't borrow to pay off existing debt; a possible
exception might be a cheap 'consolidation' loan
but if you opt for one of these do not borrow more
until the loan is repaid.