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Spent too much over Christmas?

Christmas and credit card debt

The decorations have been put away, the presents unwrapped, the last bite of pudding eaten and the champagne drunk. Now that the party is over, all that’s left on New Year’s Day is the debt because you spent too much over Christmas.

Australians were forecast to spend more than $16 billion this festive season, racking up large credit card bills in the process. According to credit reporting agency Veda, there has been a 10 per cent surge in credit card applications in the December quarter every year for the past five years, with a similar rise in the number of defaults.

Another survey by Dun & Bradstreet found that 40 per cent of families with children expect to face difficulties paying their credit card bills over Christmas, despite a decline in the number of people seeking increased credit.

Consumers ‘conned’

Chris Whitecross previously worked in a major Australian financial institution, but warns that consumers are being conned into using credit.

“I was a banker for 30 years, and every February/March you would find people getting themselves into strife because they had no plan or budget – they just went out and spent at Christmas,” said Whitecross, managing director of management consultancy Arrowdynamics. “The banks and retailers know that if you use your credit card you’re going to spend more money, and if you can’t afford to repay it they can charge interest. You’re basically fighting against consumer society in trying to use cash.”

Credit card debt historically peaks after the holiday season, with the interest bill continuing to climb for those unable to fully repay the debt within the required period.

According to ASIC’s MoneySmart calculator, if only minimum monthly repayments were made on a $5,000 credit card debt at an 18.5 per cent interest rate, it would take 35 years to pay back and end up costing more than $18,000.

Whitecross suggests three steps to enjoying a debt-free Christmas:

1. Set a budget

Everyone should have a budget that should be able to identify areas of potential savings. Before going Christmas shopping, work out exactly how much you need to spend and withdraw it in cash. Leave the credit card at home to avoid any temptation, and if necessary, cut it up.

2. Use debit cards

If you don’t feel comfortable carrying wads of cash, another option is to use debit cards, which withdraw funds from your savings account. This means you are unable to spend more than you have in the account.

3. Buy fewer but better presents

Rather than filling up the Christmas stocking with numerous presents, Whitecross suggests buying a single quality present for each child and other, inexpensive gifts.

“If kids get one present that they wanted and it’s a good quality one, you can fill up the rest with little things and they’re generally quite happy.”

Regular savings plan

RaboDirect spokesperson Renee Amor suggests allowing plenty of time to buy gifts to avoid the late rush, as well as saving regularly in advance of Christmas through a high interest savings account.

“The first thing you will want to do is pay off any credit card debt,” she says. “It is likely the most expensive debt you have and should take priority. The best way to avoid history repeating itself at the end of 2013 is to start a regular savings plan at the beginning of the year.”

Other tips for Yuletide gifts include organising a ‘Kris Kringle’ for family members, where each person buys only one present for another family member at a capped price; shopping during end of season sales; giving gift cards; and doing comparison shopping online before hitting the stores. If you’re a creative person, why not make your own presents for family members with that special personal touch?

If you have spent too much over Christmas, don’t be afraid to speak to your financial institution about refinancing debts at lower interest rates or other solutions.

“Banks would much prefer to have a rescheduled payment system with someone than the customer not paying at all,” says Whitecross. “Where they get upset is when people don’t come and talk to them.”