This year, many people will be feeling more financially stretched than ever before, turning to credit cards or buy-now-pay-later schemes such as Klarna, to create a magical Christmas in spite of Covid.
Research suggests that after not seeing loved ones for the best part of 2020, some people could feel more inclined to spend, resulting in unmanageable debt that often lingers like the smell of a bad brussel sprout.
But is credit card or buy-now-pay-later debt that bad? This guide gives the answers you need to questions like this and explains how credit card debt can stop you from getting a mortgage or taking out finance for things like a car or mobile phone in the future.
How much debt does the average Brit get into for Christmas?
The Bank of England reports that the average person in the UK spends an extra £800 a month at Christmas but a third of us are getting into debt by borrowing money or taking out credit cards to fund festivities, according to National Debt Advice.
Over a 16.9 million of us borrow money to pay for Christmas gifts
One in five of us put festive food on some form of credit - (10.4 million people!)
One in twenty will skip paying a bill at Christmas because they cannot afford to pay it which results in approximately 2.3 million late payment charges.
Taking out credit when you’ve been financially hit
Thousands have been furloughed in 2020 and many self-employed workers have turned to the SEISS scheme to support their income too. Though Government schemes have supported many, research from employee payment app Hastee discovered that the youth may have been hardest hit.
Almost three in five (59%) of those aged between 18 and 24 say they have “regularly” or “more than once” applied for high-cost credit (such as buy-now-pay-later schemes, credit cards, overdrafts or payday loans) knowing they’d struggle with repayments but felt they had no other choice.
42% of young workers said they have been unable to make an essential purchase due to lack of readily available cash.
In some cases, this age group is regularly going without basic food or meals (16%) and heating (8%) to make ends meet.
When asked why they access high-cost credit, over half (53%) of the young and working said it was to pay for everyday expenditure — to bridge to the time when they get paid.
More than half (55%) of 18 to 24-year-olds — the greatest proportion of any age demographic — would like to be paid more frequently in order to have increased control over their finances.
Hastee CEO James Herbert commented on the findings, “Our research shows that many of Britain’s youngest workers are already heavily reliant on high cost credit, and we know that many people are under greater financial pressure than ever before.”
Feeling the need to buy more at Christmas
Although the pandemic has financially affected the budgets of many people, the pressure that some feel to give more at Christmas could also be an influential factor when it comes to credit card debt.
A staggering 25% of people told credit card company Tymit that they felt more pressure to make this Christmas the best ever after a year dominated by the pandemic, with 21% set to spend extra to make this a reality.
Taking out a credit cards to host Christmas
Christmas can influence people to spend much more than they usually would in a bid to impress and share a perfect day with family and for first-time hosters, this prospect can be financially daunting.
1.3 million people have found themselves in the position of hostess with the mostess this Christmas and research found that while the average spend of hosting is £427, 70% of those asked said that their most expensive Christmas was the first one they ever hosted.
Pigs in blankets, buttered garlic mash and turkey crowns don’t come cheap and often, so much food goes to waste with 31% of hosts admitting they have previously bought too much food.
It seems hosting at Christmas also results in a choice of more expensive food and drink too, as well as purchasing new tableware (17%) and additional decorations (17%).
The result? One in seven people report that they’re still paying off debt from a previous Christmas.
Paying for Christmas gifts with a BNPL account
Buy-now-pay-later schemes such as Clearpay and Klarna are also in demand this Christmas and shoppers aged 18-24 owe an average of £225 on Buy Now Pay Later (BNPL) schemes - 28% more than your average shopper.
The schemes can provide flexibility for a lot of their typically millennial customers who are enticed with interest free repayment options and personalised adverts.
With the rise of online shopping, retailers including Etsy and Schuch have followed the lead of retail giants like Asos and this increase of availability is shockingly apparent. Research found that during a typical shopping process, BNPL pay later can be offered as many as 46 times.
When asked by Money.co.uk, 36% admitted to being concerned about their finances as BNPL encourages them to take on unsustainable debt.
Is it too easy to rack up Buy-now-pay-later debt?
Sleek designs for online shopping sites which promote BNPL make transactions quick and some fear that the ease of access to finance doesn’t provide enough friction or time for borrowers to reflect on their purchasing behaviour which could, if left unchecked, spiral out of control.
The charity, Money and Mental Health Policy Institute, has warned that shoppers, particularly those with mental health issues who are more likely to be impulsive, could be spending beyond their means.
Money management and mental health
It estimated that more than three million people with mental health problems have found it harder to control their online spending since the spring lockdown began and the charity worries that overspending will rise with Christmas and promotional events like “Black Friday” or “January sales”.
Money and Mental Health also found that during the pandemic, those experiencing a low mood, increased impulsivity or reduced cognitive ability could be at risk of uncontrolled spending.
As people have spent more time at home because of the coronavirus pandemic there has been an increase of time spent on online shopping sites, which are available 24/7.
Three in ten (29%) people who have recently experienced a mental health problem have spent more than they can afford when shopping online in the last twelve months, more than double the rate among people who have never experienced mental health problems (12%).
Is taking out a credit card or a BNPL scheme a bad idea?
Taking out credit whether on a credit card or through a buy-now-pay-later scheme doesn’t necessarily negatively impact your credit score, however, defaulting (missing repayments) can seriously hinder your ability to take out credit in the future.
If you can afford to repay a credit card debt under the agreed terms and before you incur interest, you may even build your credit score as this can prove to future lenders that you have a history of good money management.
Accumulating interest rates and fees for Christmas debt
If credit card or debt from a BNPL scheme is left unpaid, interest and fees can accumulate yet according to Comparethemarket. 45% of those who used a BNPL scheme in the past had missed at least one payment and 48% said they had incurred additional fees for a missed payment.
Some credit providers, though not all, allow their borrowers to freeze their accounts or take a payment break, though terms and conditions will vary between lenders.
This can help some borrowers who are finding their repayments unmanageable though it’s important to be aware that interest can still accumulate during a payment freeze and will be payable after any break.
It can be a good idea to speak to a debt management service for advice about the best solution to clearing debt if you’re finding it difficult to keep up with repayments. Speaking to the creditor is important too as this can help you to avoid fees which can accumulate if communications such as letters, emails or phone calls are ignored.
What happens if I default on a credit card payment?
Whenever you borrow money under a credit agreement, you make a contractual promise to repay the debt on time.
If you default, (don’t repay your debt under the agreed terms) the creditor or lender you borrowed from is likely to report this to the various credit reference agencies including:
Equifax
Experian
Clearscore
TransUnion
Credit reference agencies (or CRAs) store financial data about your credit applications, debt, income and now with Experian Boost, even how regularly you pay your Netflix on time.
What displays on your credit reports matters because future lenders will look at your history and credit score to decide if you’re a safe borrower and subsequently, if they can approve your application for credit.
Missed payments for credit agreements are visible to lenders on credit reports for six years so if you miss a payment, this could affect your ability to apply for future BNPL schemes, credit cards, car finance or a mortgage.
I have credit card debt, can I get a mortgage?
Christmas credit card debt and other financial burdens can reduce your choice of lenders if you’re looking for a mortgage because typically, lenders prefer applicants with a low debt-to-income ratio and clean credit history.
Having issues on your mortgage application like bad credit won’t automatically result in a rejection with all lenders as there are a handful that are more open to providing loans for people with credit card debt.
Sometimes, the severity or the debt, whether it has been settled and when it occurred can impact a lender’s decision to accept you or not and the size and stability of your income can also affect a lender’s appetite to loan to you.
Find a mortgage lender that accepts credit card debt
Finding a lender who accepts debt on a mortgage application from a credit card, CCJ or buy-now-pay-later scheme is a lot quicker with the help of a mortgage broker.
Sure, you can use comparison sites and call numerous mortgage providers yourself but accessing the best rates and knowing which lenders are suitable for you often depends on expertise.
Our brokers work with lenders throughout the UK and take great effort in finding well-matched lenders for borrowers with bad credit - even those that have been told they can’t get a mortgage elsewhere.
Homeownership could be possible with credit card debt but it’s important that any mortgage or loan you take out is affordable and right for you, so seek independent financial advice before signing a credit agreement and speak to a mortgage broker too, as they can compare deals and suggest appropriate options that fit your circumstances.
How can I avoid negatively impacting my credit score this Christmas?
Whether you’re saving for a mortgage or just trying to be more financially organised, a great place to start if you want to reduce your spending at Christmas is of course gifts.
Now we’re certainly not suggesting Scrooge like antics or coal in stockings but being mindful about how much you’re spending could help you to evaluate your outgoings in December.
Write a list of the people you’re planning to get a gift for this year and set a budget per person so that you know how much you’re spending in total.
Before making any purchase, don’t succumb to website checkout countdowns and give yourself a cooling off period, even if 10 minutes. You might even find a discount code in the time it takes to consider the purchase or, perhaps you’ll decide against it altogether.
If you have to dip into debt to fund Christmas, compare a range of credit options and always repay any form of credit via a direct debit, in full and on time to avoid fees, interest or worse - negatively impacting your credit report.
Set a reminder in your phone for any important payment dates.
Review your credit report ahead of taking out any debt to keep track of your credit score and any credit agreements that you have
