BEFORE you hammer your credit card with millions of other Australians this month, take some time to think about the best and worst ways to pay for Christmas.
A new study by comparison website Mozo.com.au has found that the average credit card is one of the most expensive ways to pay for the holiday season, and there are cheaper alternatives you may have missed.
It says based on Reserve Bank of Australia credit card data, consumers will put an average $3744 on plastic in December, and its research has found that 56 per cent of us haven’t saved up for Christmas.
“For many households, turning to loans or credit cards may seem the only option to cover the cost of Christmas, but choosing the wrong way to pay can add 25 per cent to the cost of Christmas,” said Mozo director Kirsty Lamont.
At the top of the naughty list are short term cash loans, which typically charge interest rates of 47.6 per cent and establishment fees of $400, Mozo found.
“Regulators have capped the amount they can charge but it’s capped at a very high level,” Ms Lamont said. “They’re nothing but trouble and could get you into a huge mess.”
She said cash loan companies were using slick marketing and super-fast loan processing to appeal to borrowers. “Young people are being targeted by the marketing of these companies.”
Average credit card interest rates are 17.2 per cent, Mozo found, while unsecured personal loans cost 11.7 per cent and overdrafts cost 13.1 per cent.
Zero per cent purchase rate credit cards are a better option if repaid quickly, while dipping into home equity can work if you are disciplined. “If you have a mortgage and are ahead on your repayments you can take advantage of that to tide you over Christmas. If you pay it off quickly the cost of that will be vastly cheaper,” Ms Lamont said.
Personal budgeting specialist David Rankin, founder of Sort My Money, said the December-January period was a “triple whammy” for consumers.
“We have Christmas, summer holidays and back to school. That’s spread out over six months in the northern hemisphere. We have it all in six weeks,” he said.
Mr Rankin said the best way to pay for December was with cash, because even debit cards could cause people to lose track of their spending.
“Cash is the ultimate way to get under control. I reckon most Australian families, if organised, can keep their Christmas costs down to $1500 — that includes present buying, extra food and going out.”
Mr Rankin said borrowing against a mortgage or zero interest credit cards were preferable to other forms of credit “but make it the last ever time you have done Christmas on credit”.
NAUGHTY AND NICE WAYS TO PAY
Type Interest rate Establishment fee
Short-term cash loan 47.6% $400
Average credit card 17.2% $118
Unsecured personal loan 11.7% $157
Overdraft 13.1% $58
Home loan redraw 4.38% $25
0% interest credit card 0% $71