It’s very easy to run short of cash at Christmas time and even easier to find a creditor happy to help you cover the shortfall (for a price.) Here are the five worst ways you could pay for Christmas in 2013.
1. Express Loans
If we’re getting biblical at Christmas time, you’ll want to avoid these like the plague. Just about the very worst way you could cover a shortfall this Christmas is with an express or payday loan. With annual percentage rates in the order of 288% – more than 10 times higher than the highest credit card rate – these arrangements are the most expensive way to borrow money that you could possibly find.
Popular “express loan” providers like Nimble and CashTrain charge fees of around $24 for every $100 borrowed. So if you borrow $500 to cover Christmas expenses, you’ll pay a whopping $120 in loan fees.
Don’t even consider them a last resort – just pretend they don’t exist.
2. Credit Card Cash Advances
According to Reserve bank statistics, Australians withdrew $757million in cash from their credit cards last Christmas, and paid dearly for the privilege. Not only are cash advance rates higher than normal credit card purchase rates at up to 29.49%, you will generally pay a cash advance penalty fee as well.
But wait, there’s more … and one that’s guaranteed to hurt when your bill arrives. Interest free days only apply to purchases made on your credit card not cash advances, so you will be paying interest from the second you withdraw the cash.
3. Store Cards
Now is the time of the year when retailers really start to push these cards with interest free offers, deferred payment plans and rewards points on spend. But stay strong and say no!
Store cards for places you regularly do your shopping may sound tempting but the downside is being tempted to spend a lot more than you otherwise would and shop there even when better prices are to be had elsewhere (or online.)
Also if you don’t pay your balance off in full every month, you’ll be whacked with extortionately high interest rates. The David Jones Store Card for example, charges a 24.74% interest rate, which is higher than any credit card purchase rate in the Mozo database. The Myer Card interest rate is only slightly lower at 23.49%.
If you fail to pay off the balance in full before the interest free period ends, the interest you pay will totally wipe out any savings discount or rewards points you might have earned. So if you’re not disciplined about paying your cards off in full every month – politely decline to sign up, no matter how persistent or sweet sounding the offer.
4. Bank Overdrafts
Taking out a bank overdraft to pay for Christmas is effectively spending money you don’t have – and you’ll be charged fees for overdrawing your balance and penalty rates equivalent to a credit card cash advance! Don’t go there, it’s just not worth it.
5. Rewards Credit Cards
Rewards credit cards are great in theory but the reality is that most rewards cards these days have high interest rates, big annual fees and deliver minimal rewards value to the average credit card spender.
What’s more, it’s easy to be tempted into spending more than you normally would to chase those shiny rewards points. If there’s even a small chance you won’t be able to pay off your Christmas credit card bill in one go before the interest free days are up, you’re better off ditching the rewards card in favour of a low rate card without the fancy extras.
Better ways to pay for Christmas:
• 0% purchase credit cards where you pay no interest on purchases for 6, 12 or even 18 months. Just be sure to check the revert rate and make sure you don’t succumb to the temptation to overspend. Treat them as a short-term measure and you’ll be fine. One great option available right now is the Commonwealth Bank Low Rate MasterCard with a 12 Month 0% purchase rate offer.
• Short-term loans from family or friends. Why pay hundreds of dollars in express loan fees when relatives or friends might be able to help you out for free. Ensure you agree repayment terms that are realistic and acceptable to both parties before going down this route.
• Low rate personal loans from a bank or credit union. Personal loan rates are the lowest they have been in years and most providers offer easy online application and fast approval. Compare personal loans to find the best deal.
• Pay in cash. Recent consumer research from the US has shown that paying in cash is a good deterrent for overspending. It’s easier to swipe and forget than run out of cash in your pocket without realising!
• Spend within your means. The true spirit of Christmas isn’t about competing over who provides the most expensive and showy gifts. Get back to basics with a generous table, thoughtful gifts and experiences and let the rest of the humbug go.