Snowballing credit costs will encroach on Christmas shoppers this winter, causing them to be unable to afford their holiday gifts.

As fuel and energy prices rise, inflation is causing the greatest squeeze on spending since the last decade. 

So, many households are already cutting back on savings and turning to plastic for greater than one year.

Households have already cut back on saving and turned to plastic at the highest rate for more than a year

Already, households have cut back on savings and used plastic at an alarming rate for over a year. 

At the same time credit card interest rates are at a 23 year high, and overdraft fees have reached a peak of 33.84 percent.

The Christmas season is also a time when consumers are being bombarded by offers from unregulated, controversial ‘buy-now and 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.

Sue Anderson, spokesperson for charity, says that credit cards and pay-now/pay-later will likely account for most of this year’s borrowing.

Both could lead to people not repaying their debts in the time they plan and increasing their risk of becoming more dependent on it.

Get gifts made of plastic

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

Nearly half of shoppers who intend to borrow for Christmas expect to spend at least six months paying it off

 Nearly half of shoppers who intend to borrow for Christmas expect to spend at least six months paying it off

Last week’s Bank of England data revealed that the average credit card interest rate has risen to 21.49% from the 20.78% at March’s outbreak.

This means that credit costs are at their highest level 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 per cent 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 from Hargreaves Lansdown is a senior personal finance analyst. She says: “The spending squeeze helped to stimulate the return of credit cards, and a slowdown for savings.

Paying off late

The Bank of England this week said inflation would exceed 5 per cent next year — putting household budgets under pressure. 

Citizens Advice discovered last month that 3.2 million families faced financial difficulties this winter due to the cost of living crunch.

Research by the charity also revealed that almost ten percent plan to take out interest-free, buy-now-pay-later loans for Christmas shopping. 

Borrowers hit: Credit card interest rates have hit a 23-year high and overdraft charges have also peaked at 33.84%

Borrowers are hit: Credit card interest rate have reached an 23-year peak and overdraft costs have also reached an all time high of 33.84%

Experts, campaigners, and others fear that the credit’s constant promotion encourages shoppers to buy more than they are able to afford. 

The sector is not yet regulated so borrowers don’t have the same protection as if they use credit cards and overdrafts.

Financial Conduct Authority (FCA), a watchdog for cities, said that in February the sector was booming and needed immediate regulation to safeguard 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.

Credit card rates have continued to rise despite the Bank of England base rate remaining fixed at a record low of 0.1%

The Bank of England’s base rate of 0.1% has been maintained at an all-time low, but credit card rates continue to climb despite this.

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 debts can be transferred to creditors.

Oct. research revealed that almost half of all buy-now-pay-later customers were behind in their payments, and nearly a third had had their credit scores hit.

Finance website Credit Karma also estimated Britons had spent £5.79 billion using these schemes — and more than £4 billion 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.

The regulation would require lenders to perform proper affordability checks, and guarantee that those who can’t repay their loans on time are treated fair. 

Borrowers have the option to file a complaint to the Financial Ombudsman Service to receive compensation.

Stella Creasy, Labour MP: “It doesn’t take a rocket scientist or a computer expert to see that people will start spending more this Christmas.” It’s possible to see millions, even billions of pounds in debt.

“The alarming thing about buy-now-pay-later programs is their lack of knowledge as a type of credit. 

Without proper regulation, major brands should not engage with Klarna and other big-name companies. I fear we will see an influx of debt-strapped people.

Now you can spread cost of £21,500 perfume 

Eau dear: A bottle of Soleil Lalique Crystal Edition perfume costs £21,500

Eau dear: A bottle of Soleil Lalique Crystal Edition perfume costs £21,500

It is known as the largest luxury department store in the world. You wouldn’t associate Harrods with its usual customer base with a buy-now, pay-later scheme. Klarna, however, announced that it has partnered with Harrods to offer customers the opportunity to loan money and pay interest free.

This allows Harrods shoppers in Knightsbridge (West London) to spread their high-end goods’ costs over three installments. Klarna states that the service will be available for beauty products only, but it could also be offered to other departments.

Martyn James of Resolver complains website says that if there’s anything that shows the inadequacy of buy-now,-pay later schemes, it’s this partnership. We have known for a long time that the industry believes it’s there simply to make people more affordable. However, Harrods is not affordable and accessible.

One of its most expensive beauty products on offer this festive season is a 1,500ml bottle of Soleil Lalique Crystal Edition perfume for £21,500. If a customer were to take advantage of Klarna’s ‘Pay in Three’ service it would split the cost of the perfume into payments worth £7,166.66.

Klarna sets spending limits for customers according to the amount of their purchases and the length of time they’ve been shopping with them. Alex Unitt (partnerships director at Harrods) said, “Harrods is well-known for offering a great shopping experience. This latest partnership with Klarna allows us to offer our customers maximum flexibility as well as convenient payment options.”


Selling credit

However, Christmas shoppers are unlikely to see the name of ‘Klarna’ on their December gift lists. 

The advertising for the Buy-Now, Pay-later program is prominently displayed on hundreds of retail websites. It appears, among other places, on Boohoo’s homepage and JD Sports’ homepage. 

The credit company is advertised on the London Paddington Station Christmas tree. Klarna and Harrods’ latest partnership confirms this.

Klarna data shows that retailers experienced a 48% increase in Black Friday sales this year. 

Boohoo offers customers paying with Klarna a year of next-day free delivery

The same thing happened at MyProtein. Customers could win free shopping as part of their Black Friday promotions if Klarna was used to pay.

Christmas spenders are also being bombarded with offers from controversial and unregulated 'buy-now, pay-later' firms

The Christmas season is also a time when consumers are being bombarded by offers from unregulated, controversial ‘buy-now and pay-later’ firms

Money Mail has learned that the Advertising Watchdog will be investigating whether buy-now and pay-later are being promoted responsibly.

Baroness Rosaltmann is a consumer activist. She says that she worries about the tendency of people buying things they don’t have enough money for, but end up causing more problems.

Debt shark alert 

A debt charity is warning of impostors looking to cash in on money misery after ‘misleading and irresponsible’ advice adverts were banned.

Advertising Standards Agency discovered that National Debt Service promotional materials from Financial Support Systems indicated the company was associated with National Debtline charity. 

The advertisements suggested the scheme had been approved by the Government. 

Jane Tully, from charity the Money Advice Trust, says there is ‘a serious issue with misleading debt advice ads’. 

Richard Lane from StepChange adds that there are many incentives for consumers this Christmas to get them to buy now and pay later.

“Our concern is that they might encourage people to borrow money they wouldn’t otherwise, tempting them to spend more than they have the means to afford. 

This is in direct contradiction to our belief that credit should not be a side effect of sales, but rather an active choice by customers.

Gareth Shaw is the head of money for Which?. He says that there are obvious benefits to buying-now and paying-later services. 

You can use them as a convenient alternative to expensive credit. 

However, Which? Research has shown that people are more likely to shop online to save money than to pay later.

“There shouldn’t be any delay in implementing regulations.”

Xmas hangover

The Bank of England also reports that overdraft rates now stand at an all-time high.

The regulator had ordered a revision of fees because it was concerned that some customers could be disproportionately burdened by high costs.

In order to make it easy for borrowers to understand the cost of overdrawing, the FCA requested that banks introduce a simple charging.

Banks and building societies were required to drop fixed-penalty fees and increase interest rates by up to 50% under the new rules.

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

Klarna spokesperson says that they assess the ability of a person to pay back on each purchase. They also have spending limitations and limit Klarna’s use after missing payments. This prevents additional spending. 

“We are licensed banks and we already adhere to regulations. We are happy for regulation to ensure that high standards of service and quality are maintained across providers.

Boohoo spokesperson says that it welcomes collaboration between financial regulators, retailers and providers to find the best way for vulnerable customers not to get into debt.

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