The cheapest ways to fund your Christmas spending

The modern Christmas doesn't come cheap. In 2009 the average person spent £435, with families spending £170 on their dinner alone. But it is our children who really do well out of the whole thing. A survey out from Bic Kids last year suggested that parents routinely spend more than £200 on each child at Christmas.

Should we really be spending all this money? Of course we shouldn't. Our small children would as we all know be as happy with a new cardboard box and a bit of ribbon as anything else. And our older ones might fancy several hundred pounds worth of presents right now, but they won't thank us if the result of that is that we can't afford to help them out with their costs when their university years roll round, or that we can't finance our own retirements.

But the fact that we know we shouldn't overspend at Christmas doesn't mean we won't nor that a great many of us won't end up borrowing money to do so. Note that according to research firm Defaqto, more thantwo million people are still paying off the costs of last Christmas even now.

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Three forms of debt you must avoid

So if you must take out debt to pay your festive bills, how should you do it? First, the things to avoid. The obvious one is payday loans. These, offered by the likes of wonga.comand quickquid.co.uk, will lend you money very fast and with very few questions asked. But they'll really make you pay for it. Check out the websites and you will find that the equivalent annual interest for the average payday loan is well over 2,000%. Yes, 2,000%. Borrow too much at that kind of rate and you'll be paying it off long beyond next Christmas.

Next up are store cards, which charge absolutely extortionate rates of interest and should be avoided at all costs regardless of the incentives you might be offered at the till. Watch out too for non-card financing deals you might be offered by websites and catalogues. Choose one of Very.co.uk's 'buy now pay later' deals and you could easily find yourself paying an effective interest rate of 40%. That might be a lot less than 2,000% but it is still far too high.

Finally you should avoid unauthorised overdrafts. A report out last summer showed that once you take the various fees and penalties into account, the average rate charged by the big banks is nearly 170%. The banks might say that this makes sense given the fact that you are borrowing without having been given permission to do so, but from a borrower's point of view it is still too much to pay.

Not all overdrafts are bad

That said, overdrafts aren't all bad. An authorised one might be one way to go if you aren't borrowing much. And if you aren't doing it for long.

While overdraft rates on some accounts are heading towards 20%, some will charge you significantly less. Santander charges nothing on overdrafts for the first 12 months that they are agreed with new customers (on its Preferred Overdraft deal). This reverts to a still relatively low 12.9% at the end of the year. Barclaysalso offers those who switch to it a no-interest deal for 12 months.

However if you switch accounts to take advantage of one of these offers, you'll need to do it fast to be in time for Christmas. And you really need to be sure you can pay the cash back during those 12 months: the rate then rises very sharply to just over 19%.

A 0% credit card is the best option

The other obvious alternative is to look for a personal loan. But this might not be the answer it was a few years back. For starters loans are hard to get you need a clean credit record and even if you can get one you are likely to find the rates very high indeed. If you want to borrow £1,000 or less, you could easily find yourself paying 20% plus, which might make you wonder why you hadn't just used a credit card.

Which you probably should have. The fact is that right now if you can get a 0% credit card, you will probably find it the best way to pay for short-term borrowings. Tesco's Clubcard credit card might be a good bet it has a 0% rate for 13 months. Halifax offers something similar as long as you have a current account with it 0% for 12 months. Barclays Platinumand MBNA Platinum also offer 0% deals and Santander has one offering 0% interest for six months.

The catch as you might guess from the "Platinum" bit is that you do need a good credit rating to get any of these. You will also need to make absolutely sure to pay off your debt quickly. If you don't, you'll find that the rate rises fast when the introductory period ends.

Finally, if the 0% card idea doesn't work for you and your credit rating, you might look at some of the peer-to-peer lending sites. Zopa, which I have written about here before, offers lower interest rates than the banks. This week, if you had looked at Zopa.com, you would have found £1,000 on offer for a rate of around 15-16%, a number which takes Zopa's fee of £124.50 into account. Borrow more and you'll pay less (£5,000 is on offer for 8.8%).

That's very good indeed when you compare it to the offers from the big banks. You will need a good credit rating if you want to apply and get the lowest rates. However, even if your rating isn't perfect, you should find you can get money from Zopa much more cheaply than you can from your bank. There are also no early repayment charges.