Avoiding the ghosts of Christmas debt

With Christmas approaching, many Britons may be raiding their savings accounts in order to spend more on food and drink, presents, travel costs and decorations. However, the recent financial turbulence could have left people keen to boost their savings balance, rather than see it drop. With that in mind, what are the best ways to go about buying those essentials in the run-up to Christmas, without facing a substantial financial fallout in the new year?

The debt of Christmas Past

Christmas could be one of the major driving forces behind the growth in personal credit and loans. Figures from Credit Action show that the UK's communal debt grew by £1.5 billion in November 2008, but by £2.2 billion in December of the same year. The majority of December's lending was in the form of secured loans, meaning some people may have put their homes at risk in order to enjoy the holiday season.

Since the recession, Credit Action notes that there has been a proliferation of nuisance calls from debt resolution firms. One in 20 unwanted sales calls before the recession were for debt solutions such as debt management services and personal loans; this has since risen to 28 per cent of all calls, a total of 840 million separate sales pitches each year. Credit Action adds that the period from November to February is a peak time for these calls, which may encourage families to address their own finances in order to avoid falling prey to an unwanted debt solution.

Spending for Christmas Present

A Credit Action Christmas report notes that 59 per cent of people are planning to reduce their festive expenditure in 2009. The findings from Abbey Savings indicate that the majority of people are cutting back on what they spend on entertaining and preparing for the holiday period. Almost one in three people, 32 per cent of those questioned, are still expecting to spend as much as nine per cent of their existing savings on top of their regular income, in order to meet the extra costs of Christmas.

While savvy savers might be well prepared for Christmas, the Abbey Savings study found that one in five people are heading into yuletide with no savings whatsoever. Almost two-fifths (39 per cent) of those surveyed are not saving at present either, which could put them on an unsteady financial footing as the new year begins. In all, the expected cost of the holiday season is placed at £3.45 billion by the financial services provider.

However, the reality could prove different to consumers' good intentions. Mintel previously reported findings from Christmas 2008, when 41 per cent of adults it canvassed had plans to cut down on their spending for the event. In reality, fewer than three in ten (28 per cent) managed to do so. Almost half (49 per cent) of Britons aged between 16 and 24 admitted that they too had spent more in 2008 than in the previous year.

Saving for Christmas Future

Families who have experienced a frugal festive season in the past may be more inclined to save for the future; however, there are a number of different ways to do so. For items such as groceries and drinks, a loyalty card such as the Tesco Clubcard or Nectar card could be the ideal way to save up. These earn points based on how much you spend over the course of the year at participating retailers, with the accumulated balance redeemable for discounts at the till or for lower prices on entry to tourist attractions or services such as breakdown cover.

A second option is to use a third-party savings scheme such as a Christmas hamper provider. This might not seem too attractive, however, since October 2006 and the collapse of Farepak. The hamper and high-street vouchers provider faced increased costs after retailers began to demand payment up-front for their products, rather than providing them as credit. Ultimately it collapsed, leaving families facing the prospect of Christmas without the goods they had saved for all year long.

While the banks may not have been seen in the best light recently - and with interest rates still at a historic low - savings accounts remain an option for long-term finances. Often more favourable rates can be found by locking into a 12-month account, which could mature just before the following Christmas. Savings held with banks are also covered by the Financial Services Compensation Scheme, which promises to pay back up to £50,000 of savings if the relevant financial services provider is declared bankrupt.