Christmas: Living on borrowed time

Bow on credit and debit cards

I'm Fergus Muirhead and I'm here to answer any questions you may have about any money or consumer issues.

Please drop me a line at fergus@bbc.co.uk with your questions. You can also read more on money and consumer issues on my own blog.

In a change from our usual question and answer format, this week we're going to have a look at the relative merits of various forms of borrowing as Christmas approaches fast and your wallet is not as full as you thought it was!

Many of us will borrow some money over the next three months to use over the Christmas period, and before signing on any dotted lines it is important to check out how much you will have to pay for the money you borrow.

So here's the lowdown on the various types of borrowing around, and how much each one is likely to cost you.

Overdraft

Overdrafts are generally cheaper than a loan or credit card, and may even be free if your bank offers an "overdraft buffer" to help at the end of the month.

Having said that, overdraft rates have crept up recently and it may be that if your need for cash is for more than the very short term you would be better off looking at a personal loan.

There may also be a difference in the rate charged for "authorised" and "unauthorised" overdrafts.

If you go into the red without asking you are likely to get hit with a bundle of charges. And if you do, then please remember one thing - there's no point going on the phone to the bank screaming blue murder and demanding your money back.

We can argue the wrongs and wrongs of excessive bank charges until we're blue in the face but the chances are that the bank's terms and conditions will allow them to charge you.

If you want your charges back, then be nice! "I know I should have told you I needed an overdraft and I'm sorry but could you please refund some of the charges you have taken from my account?" is likely to get a more favourable response than "Give me my money back now!"

Overdraft rates at the moment vary from 0% to around 30% APR, and on top of this you may have to pay arrangement fees and other charges for payments that are rejected if you overdraw without agreement from your bank.

Personal loan

Personal loans are useful for bigger purchases, or where you need to borrow over a longer period of time.

The best place to start is probably your own bank, although these days you can pick up a loan in minutes on line at good rates if you have a good credit history.

Remember to ask whether the interest rate you are being offered is fixed or variable (with a fixed rate your payments won't change if interest rates rise) and what kind of discount you will be entitled to if you pay your loan off early.

The variation on interest rates offered by different lenders is huge, and some lenders now won't commit to a rate until they have had a look at your credit history.

For borrowers with a good history, rates under 7% APR are still available but some lenders are still offering money at around 30% APR, a huge figure when you think that base rates are still at 0.5%

Credit card

The important thing in choosing a card is basically the interest rate you will be charged. You should be able to pick up a card with a 0% rate to begin. Once you come to the end of the zero rate period then it's time to move on and find someone else that will give you money for nothing.

The other important thing to think about is when you start to get charged for purchases. Some cards will give you up to 56 days' grace before charging interest. With others you will start paying from day one so they should be avoided where at all possible.

Also check out what order your debt is cleared. With some cards the cheaper debt goes first so that the most expensive borrowings (usually for cash advances) will hover over your head longest and cost you most! It is also worth looking at the "interest-free" period that comes with the card. How many days after purchase do you have to repay any balance on your card before any interest is added? With some cards it is 0 but with others it may be up to 56 days.

As with personal loans there is a huge range of interest rates and terms and conditions on offer, so make sure you look at all of the small print before deciding on a new credit card. Many are still offering 0% rates for balance transfer or for a limited period but check what happens at the end of that period. And remember that you will pay much more if you use your credit card to withdraw cash.

Store card

Try to avoid store cards as much as you can. High rates of interest and inflexible terms make them unsuitable for most people - unless you can use them to pick up a discount in a specific shop and you can then afford to pay it off straight away before interest charges kick in.

Interest rates can be around 30% APR - incredible when you think that base rates are down at 0.5% at the moment. This means that if you owe £2,000 for 12 months you will pay around £520 in interest alone. Not a good idea! Loans and overdrafts and even most credit Cards are cheaper.

What to do?

You need to consider how long you are likely to need the money you want to borrow for.

If it is very short term then an overdraft may be the easiest way to do it, and the cheapest, as long as you remember to ask first. If it is for a longer period of time then you may be better with a loan or a credit card.

The downside of a credit card is that once you start to pay off the initial purchase you may use it to buy something else, so you need to be disciplined. If you can obtain discounts in a specific store by using a store card then that might work, as long as you remember that you may be paying a particularly high rate of interest on your purchase.

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