Credit cards snowball at Christmas as the cost-of-living crisis deepens

Christmas shoppers are facing blows from increased credit charges as the cost of living crisis deepens this winter.

Spending is on the cusp of its biggest crisis in a decade, as rising energy and fuel prices drive up inflation.

As a result, households have actually cut back on saving and turned to plastic at the highest level for over a year.

Meanwhile, credit card interest rates are at a 23-year high, and overdraft fees have peaked at 33.84 percent.

Xmas are also bombarded with offers from controversial and unregulated “buy now pay later” companies.

Research by debt charity StepChange today also revealed that almost half of shoppers who intend to borrow for Christmas expect to spend at least six months paying it back – putting many at risk of falling into bad debt.

Charity spokesperson Sue Anderson adds: “Buy now and pay later credit cards are likely to account for the lion’s share of borrowing this year.

Both potentially run the risk of people not paying back as quickly as they intended, and finding their exposure to debt mounting.

Gifts on plastic

Credit card rates continued to rise even though the Bank of England’s base rate remained steady at a record low of 0.1 per cent – meaning banks could still borrow on their own cheaply.

Bank of England figures published last week revealed that average interest rates on credit cards have slowly risen to 21.49 per cent from 20.78 per cent at the start of the pandemic in March last year.

This means the cost of credit is the highest since 1998. Figures from investment service Hargreaves Lansdown show that if a borrower puts £500 on plastic at Christmas, makes the minimum payment each month, it will take eight years and nine months to pay off the debt – a total of £549 sterling interest.

Whereas a spender putting the same amount on their credit card when rates were as low as 14.8 per cent in 2004 would have paid the bill in six years and eight months – paying just £251 in interest.

Experts are now warning of the return of the credit card – after lockdown restrictions helped many build a savings buffer.

“We’re already seeing spending increase, as more people used credit cards in October, borrowing £600m a month – the highest level since July 2020,” says Laura Souter, head of personal finance at investment broker AJ Bell.

“The spending pressure has helped credit card returns and the slowdown in savings,” adds Sarah Coles, senior personal financial analyst at Hargreaves Lansdown.

Delay in payment

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

Citizens Advice found last month that as many as 3.2 million households were facing financial distress this winter as a result of the cost of living crisis.

The charity’s research also reveals that almost one in ten plan to use interest-free lending to buy now and pay later for their Christmas shopping.

Activists and experts worry that relentless promotion of credit encourages shoppers to spend more than they can afford.

However, because the sector is still unregulated, borrowers have less protection than if they used credit or overdraft cards.

The city’s Financial Conduct Authority (FCA) said in February that the booming sector needed urgent regulation to protect shoppers.

Buy-now-pay-later companies like Klarna and Clearpay allow shoppers to defer paying for products in full — and pay in installments instead.

But if payments are not made, spenders can face late fees of up to £12 and their credit scores can suffer, making it difficult to borrow in the future. Unpaid bills can also be transferred to debt collectors.

Klarna says it does not charge late fees and says its buy now, pay later service won’t affect credit scores.

Research in October found that nearly half of buy-now-pay-later customers were late with payments, and nearly a third saw their credit scores suffer as a result.

Finance website Credit Karma also estimated that the Brits spent £5.79bn using these schemes – more than £4bn was not paid back.

However, the Treasury Department only announced a consultation on proposals for regulation in October – with no action expected until 2022.

The regulations will force lenders to conduct proper affordability checks and ensure that customers who struggle to repay loans are treated fairly.

Borrowers will also have the right to file a complaint with the Financial Ombudsman Service and win compensation.

Labor MP Stella Creasy says: “It doesn’t take a rocket scientist to know that people are going to start overspending this Christmas. We are looking at millions if not billions of pounds of debt.

What is troubling is that the majority of consumers do not know that buy-now-pay-later schemes are a form of credit.

Big brands shouldn’t be doing business with the likes of Klarna until they’re properly regulated. Without regulation, I worry we’re about to see a massive wave of underprivileged people.

credit sale

However, Christmas shoppers will struggle to get their gift lists this month without seeing the name “Klarna.”

The advertisement for the buy-now-pay-later scheme is plastered across hundreds of retailers’ sites, appearing on the homepages of fashion site Boohoo, sportswear brand JD Sports and more.

There is even an advertisement for the credit company on the Christmas tree at London Paddington station. And Klarna’s latest partnership with Harrods confirms that it is no longer just for students.

Data from Klarna shows that retailers saw a 48 percent increase in the number of sales made during Black Friday this year.

Online retailer Boohoo is offering free next-day delivery for a year to customers who pay with Klarna.

Likewise, as part of its Black Friday promotion, food store MyProtein offered customers the chance to win free shopping if they prove they’ve paid with Klarna.

Money Mail understands that the advertising watchdog is looking to investigate whether Buy Now, Pay Later is being responsibly promoted.

“I really worry about this tendency to encourage people to buy things they think they can afford, only to end up causing them more trouble,” says Baroness Rose Altman, a consumer activist.

StepChange’s Richard Lane adds: ‘A lot of incentives are being offered this Christmas to consumers to encourage them to use buy now and pay later.

Our concern is that they may encourage people to borrow who otherwise would not, tempting some to buy more than they can comfortably afford.

This runs counter to our firm belief that credit should be actively co-opted by consumers, and not simply treated as a by-product of retail sales.

Gareth Shaw, Chief Money Officer at Waters consumer group, says: “There are clear benefits to buy-now-pay-later services.

They provide ease and convenience to many, and provide an important alternative to other, more expensive types of credit.

However, which one? Research finds that people often resort to buy now, pay later at stressful and difficult times in their lives only to be faced with a barrage of online purchasing options, often without any important information about late fees, credit checks, and the risk of falling into debt.

“There should be no further delays to the regulation plans.”

Christmas leftovers

Overdraft rates are now at a record high, according to Bank of England data.

It comes after the regulator ordered an overhaul of fees amid concerns that vulnerable customers are facing “disproportionately high” costs.

The FCA also wanted banks to introduce simple fees so that borrowers could easily understand the cost of overdrafting.

Under the new rules, banks and building societies have eliminated flat penalty fees and instead raised interest rates to as much as 50 percent.

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

A Klarna spokesperson says: ‘We assess someone’s ability to pay on every purchase, have spending limits and restrict use of Klarna after missed payments, preventing extra spending.

“We are a licensed bank and already operate to regulated standards. We welcome regulation so consistently high standards are applied across all providers.

A Boohoo spokesperson says it welcomes participation between retailers, service providers, consumer groups and financial regulators on how best to protect vulnerable customers from falling into debt.

b.wilkinson@dailymail.co.uk