Paying off festive debts - the dos and don'ts

With the average UK household spending an extra £700 in December compared to other months, you might be facing a financial hangover in the new year.

While some households save up for Christmas, others borrow to meet the costs.

According to Moneyfacts, credit card interest rates averaged 35.3% APR in December, making it harder to pay off debt.

Meanwhile many overdrafts charge interest of 39.9% APR, and other types of short term loans far more.

Here, we reveal 5 dos and 4 don’ts to help you manage and reduce your festive debts.

DO prioritise your debt 

Jot down all the credit card, store cards, loan, overdraft and buy now, pay later (BNPL) debt you have, how much you owe on each, as well as how much interest you're paying. 

This will help you understand where your debt stands and decide which to pay off first.

For example, if you have two credit cards - one with six months of interest-free borrowing left, and another card already charging you interest, it’s worth trying to clear the card charging you interest first.

• Find out more: how to pay off your debts

DO use savings to pay off high-interest debt

While it’s good to have a financial cushion for emergencies, there’s little logic in having savings if you also owe money on an expensive credit card or overdraft. 

The rates available on the best instant-access savings accounts are far lower than overdraft or credit card interest rates, with the average APR (annual percentage rate) at 34.3% in December. 

If you've got overdraft debt, it's worth using your savings to pay it off first. 

If that’s not possible, consider a 0% money transfer credit card, which lets you transfer cash from your credit card to your current account with an interest-free period. The best deals currently offer up to 12 months interest-free, but with a 4% fee – so transferring £2,000 would cost £80.

We suggest using savings for overdraft debt before credit card debt, because 0% balance transfer deals (where you shift credit card debt from one card to another) typically offer longer interest-free periods and some come with no transfer fees. 

• Find out more: best 0% money transfer credit cards

DO use a 0% balance transfer credit card

Using a 0% balance transfer credit card card can help reduce your credit card debt faster, as all your payments will go towards the debt rather than the debt and interest.

The best deals offer up to 30 months interest-free, but balance transfer fees apply in some cases, with fees ranging from nothing to 3.45%. This means transferring a balance of £2,000 would cost you £70 in balance transfer fees. 

Keep in mind that the longest 0% offers typically go to those with the best credit scores, so you may not qualify for the full 30 months.

It it possible to get fee-free balance transfer credit cards, but the best deals currently only offer up to 12 months interest free, so you'll need to be confident you can pay off your debt in that time.

• Find out more: best 0% balance transfer credit cards

DON'T rely on overdrafts going forward 

While overdrafts can be useful for short-term cash flow gaps, relying on them for ongoing borrowing can be expensive. Many banks charge high-interest rates or fees, especially if you go over your overdraft limit. 

However, there are cheaper options available. For example, Which? Recommended Provider (WRP) Starling has an overdraft rate of 15% EAR (available to customers with an excellent credit score). 

Meanwhile fellow WRP First Direct offers an interest-free overdraft of £250 on standard current accounts, however, if you borrow more than £250, you'll pay 39.9% EAR.

• Find out more: best bank account for an overdraft

Make your money go further

Find the best deals, avoid scams, and grow your savings with our expert guidance. From only £4.99 a month.

Join Which? Money

Cancel anytime.

DON'T just make the minimum repayment

A simple change you can make is to opt for a fixed payment rather than just the minimum payment.

The minimum payment on a debt is usually charged as a percentage of your remaining debt which means it reduces as your debt goes down. 

For example, a minimum repayment of at least 2% on a debt of £500 is £10, but once your debt gets to £400 your minimum repayment falls to £8.

It’s not always a bad thing to pay the minimum, especially if you’re struggling for cash in a particular month. However, if you make it a habit you’ll struggle to escape the debt trap.

By committing to a fixed monthly repayment, you’ll ensure that you’re paying off more of the debt each month, clearing it faster and saving money in the long run.

• Find out more: you can use our credit card repayment calculator to work out how changing your monthly repayments can impact how long it takes to pay back your credit card debt.

DON'T take out pay day loans

Payday loans are designed to offer short-term loans to tide you over until you receive your monthly salary. They are never suitable for medium or long-term borrowing.

With APRs as high as 1,250%, they’re expensive compared to personal loans, which averaged 8.85% in October according to Bank of England data.  

Instead, explore alternatives such as credit unions, which offer lower interest rates on personal loans and charge interest only on the reducing balance. This means if you can repay it weekly, you'll pay less overall. They also do not occur setup fees, administration costs or early redemption fees. 

• Find out more: personal loans explained

DO cut back where you can

Review your spending and consider using a budgeting app to get a clearer picture of where your money is going. 

Several apps offer free features to help you track your expenses, manage your budget, and identify areas where you can cut back. 

Whether it’s reducing dining out, cancelling unused subscriptions, or switching to a more affordable mobile network or broadband deal, even small changes can make a difference in freeing up money to pay down your debt.

Our experts have rounded up the household costs going up next year and how to beat them, as well as 25 ways to make and save money in the new year. 

• Find out more: best budgeting apps 

Which? Money Podcast

Join us on our weekly audio show for the latest money news and personal finance hacks to help make you better off.

Listen now

DON'T ignore free debt advice

If your total debts (excluding a mortgage) add up to more than you earn in a year, you don’t quite know where or why you have these debts, or you’re struggling to repay them, you may well have problem debt.

There are several free, impartial organisations and charities offering debt advice, whether face-to-face, over the phone, or online. 

If you’re struggling with repayments, getting free independent advice is far better than using fee-charging debt management companies.

• Find out more: free debt advice contacts – includes contact details for the major debt advice charities.

DO ask your lender for help

If you are struggling with repayments it's also worth contacting your provider to see if they can offer any help.

In 2018, the Financial Conduct Authority (FCA) introduced new rules to help the estimated three million people in persistent credit card debt—those who have spent more on interest and fees than they have repaid on the outstanding debt.

Banks are now obliged to send letters to customers who have been in persistent debt for 18 months, warning them about the cycle they're in. 

Credit card providers must offer customers a method of repaying their balance over a reasonable period. This could be by reducing or waiving interest rates or charges.

Just bear in mind that lenders also have the ability to suspend your card to stop you from borrowing.

• Find out more: best credit card providers 2024