Don’t spend Christmas in the red

Household bills are soaring. Credit card rates are highest this century. And a new breed of lenders is luring cash-strapped families. No wonder experts are warning...

CHRISTMAS shoppers face being clobbered by snowballing credit charges as the costof-living crisis bites this winter. Spenders are on the cusp of the biggest squeeze for a decade as soaring energy and fuel prices send inflation skyrocketing. As a result, households have already cut back on saving and turned to plastic at the highest level for more than a year.

Meanwhile, at the same time, credit card interest rates have hit a 23-year high and overdraft charges have also peaked at 33.84 pc.

Christmas spenders are also being bombarded with offers from controversial and unregulated ‘buynow, pay-later’ firms.

Research from debt charity StepChange also today reveals that nearly half of shoppers who intend to borrow for Christmas expect to spend at least six months paying it off — putting many at risk of falling into problem debt.

Charity spokesman Sue Anderson adds: ‘Credit cards and buy-now, paylater are likely to account for the lion’s share of the borrowing this year.

‘Both potentially create a risk of people not paying back as quickly as they intend, and finding that their exposure to debt escalates.’

GIFTS ON PLASTIC

CREDIT card rates have continued to rise despite the Bank of England base rate remaining fixed at a record low of 0.1 pc — meaning banks can still borrow cheaply themselves.

Bank of England figures published last week reveal that average interest rates on credit cards have slowly crept up to 21.49 pc from 20.78 pc at the start of the pandemic in March last year.

It means the cost of credit is the highest since 1998. Figures from investment service Hargreaves Lansdown show a borrower putting £500 on plastic this Christmas, and making minimum repayments each month, would take eight years and nine months to pay off the debt — a total of £549 in interest.

Whereas a spender putting the same sum on their credit card when rates were at a low of 14.8 pc in 2004, would have paid the bill off in six years and eight months — and paid just £251 of interest. Experts are now warning that the credit card is making a comeback — after lockdown restrictions helped many build up a savings buffer.

Laura Suter, head of personal finance at investment broker AJ Bell, says: ‘We’re already seeing spending creep up, with more people using credit cards in October, borrowing £600 million in the month — the highest since July 2020.’

Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, adds: ‘The spending squeeze has helped to spark the return of the credit card, and a slowdown in savings.’

DELAYING PAYING

THE Bank of England this week said inflation would exceed 5pc next year — putting household budgets under pressure. Citizens Advice found last month as many as 3.2million families were facing financial crisis this winter as a result of the cost-of-living crunch.

The charity’s research also reveals that nearly one in ten are planning to use interest-free buynow, pay-later lending for Christmas shopping. Campaigners and experts fear the relentless promotion of the credit is encouraging shoppers to spend more than they can afford. Yet because the sector is still not regulated, borrowers have less protection than if they used credit cards or overdrafts.

City watchdog the Financial Conduct Authority (FCA) said in February that the booming sector needed urgent regulation to protect shoppers.

Buy-now, pay-later firms such as Klarna and Clearpay let shoppers put off paying for products in full — and pay in instalments instead.

But if repayments are missed, spenders can face late fees of up to £12 and their credit scores can suffer, making it harder to borrow in the future. Unpaid bills can also be passed on to debt collectors.

Research in October found nearly half of buy-now, pay-later customers had fallen behind on payments and close to a third had seen credit scores hit as a result.

Finance website Credit Karma also estimated Britons had spent £5.79 billion using these schemes — and more than £4billion had not been paid off. Yet the Treasury only announced a consultation on regulation proposals in October — with action now not expected until well into 2022.

Regulation would force lenders

to carry out proper affordability checks and ensure customers struggling to repay loans were treated fairly. Borrowers will also have the right to complain to the Financial Ombudsman Service and win compensation.

Labour MP Stella Creasy says: ‘It doesn’t take a rocket scientist to know people are going to start overspending this Christmas. We’re looking at millions if not billions of pounds of debt.

‘The worrying thing is that the majority of consumers don’t know buy-now, pay-later schemes are a form of credit. Major brands shouldn’t be engaging with the likes of Klarna until they are properly regulated. Without regulation, I worry we’re about to see a huge wave of vulnerable people in debt.’

SELLING CREDIT

YET Christmas shoppers will struggle to get through their gift lists this month without seeing the name ‘Klarna’. Advertising for the buy-now, pay-later scheme is plastered across hundreds of retailers’ websites, appearing on the homepages of fashion website Boohoo and sportswear brand JD Sports among others. There is even an advert for the credit firm on the Christmas tree at London Paddington station. And Klarna’s latest partnership with Harrods confirms that it is no longer just reserved for students.

Data from Klarna shows retailers saw a 48 pc increase in the number of sales made during Black Friday this year. Online retailer Boohoo is offering a year’s worth of free next-day deliveries to customers who pay using Klarna.

Similarly, as part of a Black Friday promotion, the food retailer MyProtein offered customers the chance to win their shopping for free if they proved they had paid with Klarna.

Money Mail understands that the advertising watchdog is looking to investigate whether or not buy-now, pay-later is being responsibly promoted.

Baroness Ros Altmann, a consumer campaigner, says: ‘I am really worried about this tendency to encourage people to buy things that they think they can afford but in the end gets them in more trouble.’

Richard Lane, from StepChange, adds: ‘This Christmas plenty of incentives are dangled at consumers to encourage them to use buy-now, pay-later.

‘Our concern is they may encourage people to borrow who wouldn’t otherwise have done, tempting some to buy more than they can comfortably afford. This runs counter to our long-standing belief that credit should be actively chosen by consumers, not treated simply as a by-product of retail sales.’

Gareth Shaw, head of money at consumer group Which?, says: ‘There are clear benefits to buy-now, pay-later services. They offer ease and convenience for many, providing an important alternative to other, more costly types of credit. However, Which? research found people often turn to buy-now, pay-later at stressful and challenging times in their life only to be confronted by a barrage of online shopping checkout options, often without any important information about late fees, credit checks and the risks of falling into debt.

‘There should be no further delay to plans for regulation.’

XMAS HANGOVER

OVERDRAFT rates are also now at a record high, according to the Bank of England data.

It comes after the regulator ordered an overhaul of fees amid fears that vulnerable customers were facing ‘disproportionately high’ costs.

The FCA also wanted banks to introduce a simple charge so that borrowers could easily understand what being overdrawn is costing them.

Under the new rules, banks and building societies scrapped fixedpenalty charges and instead hiked interest rates to as much as 50 pc.

Those going £500 overdrawn today can expect to pay £150.36 more than in 2004 when average interest rates were charged at 14.6 pc.

A Klarna spokesman says: ‘We assess someone’s ability to repay on every purchase, have spending limits and restrict the use of Klarna after missed payments, preventing additional spending. We are a licensed bank and already operate to regulated standards. We welcome regulation so high standards are consistently applied across all providers.’

A Boohoo spokesman says it would welcome engagement between retailers, providers, consumer groups and financial regulators about the best way to protect vulnerable customers from getting into debt. b.wilkinson@dailymail.co.uk