Avoid the Christmas credit card crunch

"Our ambition at the Bank of England is to be boring". So said governor Mervyn King around a decade ago. It's fair to say that he's failed badly.

This week, analysts are guessing that the bank's monetary policy committee could cut interest rates by anything up to 1 percentage point. That comes after an unprecedented cut of 1.5 percentage points last month, and half a point the month before.

Credit card rates are rising despite Bank of England cuts

But at least no-one can now accuse the Old Lady of not doing her bit to stave off a downturn. The same can't be said for credit card companies. "Pretty galling" is how Sean Gardner of MoneyExpert.com describes their recent actions.

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The Bank of England rate has fallen from 5.75% to 3% in a year. Yet, says Gardener, over that same period the average annual percentage rate (APR) on a credit card essentially what you pay to borrow using one has risen from 16.8% to 17.59%. Abbey, for example, has raised rates on some cards from 16.9% to 19.9%, says James Charles in The Times.

Meanwhile, the annual rate you pay to borrow on many store cards is around 25% with several charging as much as 30%. That's ten times the Bank of England base rate. Yet we love credit 31 million of us have a credit card, according to UK payments association APACS, while the Bank of England reckons we spent a combined £33.2bn using our flexible friends in the third quarter alone.

The Government threatens action against credit card companies

The latest credit card rate changes are so patently designed to bolster bank profit margins just as consumers face their worst Christmas in a decade, that the Government has decided to stick its oar in. This week, Lord Mandelson, once Gordon Brown's New Labour tormentor, went into battle on his behalf against the credit card companies. Mandy thundered that unless they change their ways, the Government will take action against them.

That, apparently, means they could be referred to the Office of Fair Trading - "a very tough consumer watchdog" - which has the power to issue unlimited fines should the card companies be found to have acted "unfairly". That could be followed by "further action", although it's not yet clear what form that would take. More to the point, it's also unclear how any of this helps anyone stuck with huge credit card debts since it's not as if they'll benefit directly from any fines imposed.

And I could be wrong, but my impression is the card companies are not exactly quaking in their festive boots. APACS simply countered "in the UK there are hundreds of different credit card productscustomers can shop around for the card that best suits them."

Card issuers have agreed to a few new initiatives, but they're hardly pushing the boat out. For example, a struggling borrower will get an extra 30 days to come up with a repayment plan but chances are if they've already failed to do so, the extra month won't help.

And here's a classic major credit card firms have agreed to share data on borrowers so that, they say, they can identify those most likely to default before extending further credit. But cynics suggest this could also be used by card companies to defend themselves against unprofitable 'rate tarts' borrowers who regularly switch card balances to the provider offering the lowest rates. The credit card providers assure us they won't use it in this way I'm not convinced.

Don't get ripped off - use your debit card when you can

So, the bottom line when it comes to credit and store cards is simple. Look after number one. The best way not to get ripped off is not to borrow on credit or store cards at all. Use a debit card instead. First off, that means there's no balance to worry about settling and you won't be tempted to run up any debts. Secondly, you'll minimise any transaction fee. Don't forget that retailers are charged by credit card companies and typically hit you with a fee for using one as a result.

Of course, there are some situations where using a credit card can be useful. For larger purchases, the consumer credit protection for items bought on a credit cards is worth having if you think there's a risk that, say, an online retailer might go bust between the time you place the order and the point where the goods show up at your home or office. And some shops offer pretty decent discounts 10% is typical at the moment - if you agree to pay using a shiny new store card.

But whatever you do, if you choose either of these routes, pay off the balance on time. One way of doing this with credit cards is to link the account straight to your current account it takes five minutes to set up the relevant direct debit. That way the outstanding balance is cleared straight away every month.

If Christmas is a strain without your credit card - cut back

Finally, a couple of Christmas shopping tips. First off, look online before you hit the high street. Not only can you often get stuff cheaper but you also get better consumer protection thanks to the Consumer Protection Distance Selling Regulations 2000.

For example you must be offered a 'cooling off' period of typically seven working days after you receive your goods. You can then opt to cancel an order or reject what is delivered simply because you don't like, or want it. What's more, provided you cancel within the cooling off period, you are entitled to acomplete refund rather than having to navigate the 'like for like' exchange policy common in many shops. Watch out though, these rules don't apply to online bidding sites such as ebay (see consumerdirect.gov.uk for further information).

And, if you're finding Christmas a strain without a credit card to lean on, then it's probably a sign that you need to cut back on your spending. There's no point on giving everyone you care about an expensive Christmas present if they then have to put up with you fretting for the rest of the year about how you'll pay for it all.

Why not agree a spending cap per person say £5 or £10 with friends and family? That way you still get something to unwrap and the monetary limit challenges the giver to put more thought into their present. And that, I would say, is what counts.

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