Guests: Ashley Holmes (AH) Ray Watson (RW)

KK: Good afternoon. It's the 14th of December and there's ten days to go until Christmas. That's a lot of shopping but for some there will be a lot of panic buying going on, and that means flexing your flexible friend. Joining us in the studio today is Ashley Holmes of the Financing and Leasing Authority and Ray Watson from the Office of Fair Trading and they're going to be giving us some tips and advice about how to use credit to your advantage. Welcome to the studio. Now, middle of December, why exactly do you think you need to be here today?

RW: Well I think Christmas is obviously an expensive time for people of all age groups, the office is particularly focusing on people in the 18-24 age range because from research we've done we've seen that people take on an awful lot of credit this time of year. We want to make sure that we get the right deal for them but that they also think carefully before they take out credit on what the consequences are because they're a new year starting in January, the old year ends but life doesn't. We want to make sure we arm them with the necessary information to make a good decision that they won't regret later.

KK: So the message is to be as choosy about your finance as you are about your Christmas shopping, or any other shopping?

RW: Absolutely.

KK: Kelly has already sent us in a question, "Are expensive purchases like washing machines and sofas the only things we should consider finance on or is it a wise option for everyday purchases? "What do you have to say on that Ashley?

AH: You've got to think about what you're doing. There are all sorts of ways to pay for things, you can use credit cards, store cards, you might be able to go into a shop and get an interest-free deal for instance. A lot of people think about taking out just for that big sofa, that big Christmas present but using credit is a really good way of smoothing out the peaks and troughs if you get paid infrequently. It may be that using your credit card is a way to get from one month to the other, but you have to understand what you are doing, and the last thing is don't overstretch yourself and don't get into debt, use credit wisely. If you use credit wisely it can be a good friend.

KK: What about you Ray, would you say you should use credit for day-to-day purchases?

RW: Well I agree absolutely with Ashley but what I would say is that if people are using it for everyday purchases because they don't have the cash then they're in trouble, basically. This is about budget planning. As Ashley said, you can smooth out the peaks and the troughs but credit is still an obligation, you have to repay. It's not free money. A lot of people find it easier to hand a card over where they wouldn't find it easy to get the cash to buy things. Day to day purchases, maybe, but I don't think it's a good idea to use credit to do that unless you're budgeting for it, and you know you've got the money to pay back.

AH: I don't know if you need to be too stuffy about this, it can be really convenient, like when I go to the off-licence for instance, I use my credit card because it's easier to use it but I do know that this is a debt I'm going into and that I'm going to pay it off at the end of the day. So go into it wisely, use it for convenience but be careful.

KK: So it's a good idea to keep a record of what you've put on your card so you don't have too much of a shock at the end of the month and actually think about that expenditure?

RW: Absolutely, but I think people just find it helpful is that on our website, the OFT website, there's a budget planner and it's sensible for everyone to look at what they're spending on going out, on day to day necessities, and plan to do it. Credit is part of that.

KK: It's all money isn't it? That's what we all forget; plastic is as much part of your spending as cash is. Another question in from Georgia, I want to see what you think of this one guys, "I'm confused by APRs, I thought it referred only to interest rates but I've learned that they also sometimes include other charges. Is this true and what other charges can we expect?"

AH: APR can be technical! What I'd say to people is that they are supposed to be an easy way to compare credit products against each other. They vary enormously and it's all about shopping around. This may sound like a very simple thing but high APR = bad, low APR = good.

KK: So it's just like paying for a car? If it's a low price it's a bargain, if it's a high price you're paying over the odds.

AH: Get the best price for you. It may be that depending on how you use your credit APR is a fictitious way of describing what happens, but it's the best method we've got. Be clever about what you're doing, think about all the options you've got available to you, but go for smaller as supposed to bigger.

KK: What do you say to that question Ray?

RW: APR is a very simple thing.

KK: Well what does it stand for first of all?

RW: It means what someone is charging you to lend you the money. Say they lend you a hundred pounds, whatever they charge you on that. Most of it is in the interest rate, but, for example, if someone introduced you to a credit agreement and they took a brokerage fee they were paid by the lender, that would be included in the APR.

KK: So it's an added cost?

RW: It's all the costs on top of the money you're borrowing. One thing people should be aware of, it's the best comparison between similar products because APRs will vary greatly, but longer loans will tend to have lower APRs so if you take a twenty-five year loan out that will be lower. So compare like products, I think that is the message.

KK: And if they're confused where can you go to get advice?

AH: Go to the OFT website, there are all sorts of agencies out there that can help. I hope everyone knows about their local Citizens' Advice Bureau, it's a free way of getting advice of this kind of stuff.

KK: Lisa wants to know, would you advise putting Christmas spending on a credit card or is a loan a better option?

AH: Christmas is the perfect time of the year to use credit, because it's the one time a year we do a bit of binge spending. If your income does go up and down and you want to make sure you can buy the presents and live within your means then think about using credit. What's right for you depends on so many things. Look at the APR. Look at the long-term commitment you want to enter into. Do you really want to go for a big long loan to buy some Christmas presents or are you happy with using your credit card? If you want best deal shopping around advice, every Sunday newspaper now has this kind of stuff available. Talk to your friends and see if they're happy with the credit they've got.

KK: And if you can't afford to buy it know, can you really afford to buy it later? Ray, what do you say to people who can't afford to pay it off this month but think, oh I'll pay for it the next?

RW: I think there's a danger there; I think you have to be sure of how much money you're taking on. I mean you're taking on a liability, I don't know how much money Lucy's going to spend on Christmas but plan to be repaying that over the next few months, she needs to think about whether she's going to have another big bill coming up in the beginning of 2006. So rather than say should I pay with a credit card or should I pay with a personal loan, she needs to establish how much she can actually afford to take on as credit. Once she's established that she needs to work out how long she's going to need to repay. If she's going to pay the credit card off in full then she's not going to pay any interest, that's an unlikely event, but she needs to compare the repayments she's going to make, the length of those repayments and again on the OFT website there is a calculator where people can put in the loan amount and it will tell them how long it will take them to repay on a credit card and how much they are going to pay overall. She needs to look at her own resources, how much she's got, how much she's going to earn next year, then look at the two, the loan or the credit card.

KK: So the important thing is to plan ahead and create a budget for yourself, it's not a case of deferring until later really.

RW: Don't wake up with a January debt hangover! Make sure you can repay it. I don't think the question has one answer; all those circumstances have to be taken into account.

KK: Yes, you have to look at your income and budget of course. I'm sure most of us live beyond our means at Christmas! Another question here from Edward who sounds like he's pretty savvy, I actually swap credit cards every three months so I can take advantage of the 0% interest rates, is this advisable? Now it sounds to me like a pretty smart idea, is he being clever with his money?

RW: I think he's being very clever, I don't think it's inadvisable, I think it's very laudable, because he's actually getting as credit product that's enabling him to get things earlier and he's not paying for it. He's shopping around, he's looking for the deals that are out there and he's an informed, intelligent consumer.

KK: In terms of the credit card companies, they must get a bit fed of lending money to people, is there a penalty, do they still get money back from you somehow?

RW: I don't think there's a hidden agenda. There are deals where you get 0% for balance transfers but you do have to pay a transfer fee, so anyone who's using those products needs to look at what the terms are before they take them out to check there aren't any costs or charges in there. If he's getting 0% interest though I think he's a star really!

KK: Edward, you're a wise man, you've got brownie points from Ray here, but of course whenever you sign on the dotted line do read the small print though, that's crucial whenever you're taking out any kind of credit or debt. Harvey says, what's the difference between credit and debt? That may sound like a simple question, but many people don't know. Credit sounds like a very positive word doesn't it, and debt sounds very, very negative. Can you explain the difference?

AH: Credit's when I lend you some money, and debt is when you owe someone some money.

KK: Yes, but it's the connotations isn't it, because credit sounds fun, whereas debt sounds terribly negative, it sounds depressing.

AH: It does. I'm in constant debt with my credit card technically speaking, but the end of the month I pay that debt off and it's not a problem. There are all sorts of connotations about debt being a bad thing, but it's not as long as you're clever about managing your finances.

KK: So what is the difference between good and bad debt? Is there a difference?

AH: Bad debt is when you're over indebted. It's when you're over stretched and the debts are piling up and you've got no way out. You can't think of a way of finding a solution to your debt problems. If you finds that you are over-stretched, talk to your lender immediately, don't put your head in the sand as that's when you've got a real problem. Your lender will work with you to make sure there's a way out.

KK: So there usually is a solution if you have the guts to stand up and put your hands in the air and say I've over-stretched myself, help me manage this? Where would you suggest people go if they have that situation?

RW: There is a range of places that people can go to. I think it's important, as Ashley said, to go to the lender first, because a lot of people tend to ignore the problem and hope it will go away but it just gets worse.

KK: So don't leave the envelopes unopened on the doormat!

RW: Definitely don't do that. It's not actually in the lender's interest that you fall into a situation where you can't repay because they've then got to start chasing up debt, so they'd rather come up with a way in which there will be a mutual repackaging so you can pay another way. If you are in serious financial problems, then you need to go to the Citizens' Advice Bureau who can refer you to some money advisors. There is a consumer credit counselling service which provides advice for people who have run into financial difficulties, who have a website that people can access. Trading Standards, it's part of the local authority, the local council. There's also a national consumer phoneline that people can call direct for advice on these issues. So there are people out there to talk to you and advise you. I wouldn't stress more the need to go to the lender.

KK: So never leave it too late, talk to your lender first and if you feel that they're not being particularly helpful there are a range of people and obviously you can get information from the OFT website.

RW: I think people tend to think that the cavalry will come over the hill so to speak.

KK: There's an "I'll win the lottery!" thing, isn't there?

RW: The harsh reality of life is that the cavalry rarely gets there on time, so I think it's important that people are in control of their credit and know when it's getting out of control. One of the indicators is if you're using credit to pay other credit off, and you find increasingly that it's snowballing, stop it early, think about it, go back to financial planning, speak to lenders, seek advice, but please do something about it.

KK: So don't bury your head in the sand.

RW: No.

KK: On a more positive note, Abby has emailed us and says, "Can I ever use credit to a consumer advantage?" Is there a way she can use it to aid her cash flow and make her life an easier, smoother, place to be?

AH: Well we just heard about Edward, what a star he is, using credit very, very cleverly. The other way you can use credit cleverly is to smooth out these peaks and troughs, when you go on holiday, either save up during the year or use your credit card. There are all sorts of ways that credit can help smooth the way you get on with life and the way in which you buy and spend your money. But make sure you know what you're doing; keep a little record of what's going on. Money can be really boring, but the more you think about it, the better position you'll be in to take charge of your life.

KK: Well it sounds like good advice to me. Ray what do you reckon, are the ways you can use credit to your advantage? I assume there are a lot of ways, to buy houses and cars as well.

RW: Yes, but there are other things as a consumer, there are additional legal protections for example, if you buy goods and purchases and it goes wrong, you actually have enhanced consumer rights because you can ask the provider of the credit as well as the supplier of the goods and purchases to repair things, make things better if things go wrong. I think credit, properly used, can benefit us all. We all can benefit from credit because it allows us to arrange our finances so we can meet what we need to buy earlier and then we can smooth our going forward. In an emergency it helps to use credit to meet that emergency. It's a sense of control, it sounds boring, but =credit isn't a bad thing.

KK: There's a safety aspect too, especially with online and mail ordering, you're not sending a cheque or cash in the post, you have a facility to pay for something without actually the ability for it to go astray.

AH: They can offer you safety and security. There are big companies behind these cards who make them as secure as possible. How many of us have got enough money to buy a new computer? To buy a car?

KK: Certainly not me!

AH: Well credit's one of the ways you can start buying that kind of stuff.

KK: Well Becky's also send us a question, she says, "How can I go about finding the best credit card agreement?" Because obviously you can't walk into the supermarket and see a shelf of different products, do how do you go about researching the marketplace?

RW: One tool that is very useful in the world we live in is the internet. There are a number of sites where you can find comparison of what's on offer at the moment. As Ashley mentioned, you can find it in most of the money pages in the papers, there's a comparison of products. One of the best ways is to shop around yourself. You know where credit deals are offered, go around and found out. You don't have to commit yourself, you can go to all the main banks, the building societies, many of whom are now banks, and there is store credit. Ask, go and find out, people have leaflets, go home look at them, compare them.

KK: And of course if you don't feel capable of making that decision you could ask someone who's a bit more savvy whether it's a parent or a friend.

AH: As Ray said the best way to do it is to go the internet and type in ‘best buy credit cards' and you'll end up with loads of pages of information. The other thing that I\d like to mention is that lots of people thing that there's loads of small print buried beneath all this stuff that's really frightening and intimidating, which is partly true but the credit card business and the store card business have now got some key stuff set out in little boxes that tell you all the key features of that deal so you're able to compare what's best for you. There are no traps.

KK: And that's a legal obligation?

AH: That's an obligation that the industry has brought forward. Self-regulation is so you know what you're letting yourself in for.

KK: So read that information before you sign on the dotted line, but make sure you shop around. If you're choosy with your shopping be choosy with your credit. Cordelia's sent a question in, this one's interesting, "I'm always wary of credit cards offered by high street shops, are they as safe as getting a credit card from a bank or another supplier?"

AH: I think what she's probably talking about are store cards, with the shop brand on the front and it looks like a credit card but it hasn't got the Barclaycard on the front or the MasterCard it's got Debenhams for instance. Store cards and credit cards are slightly different, credit cards you can use anywhere they've got that logo, store cards you can only use in that particular shop. There can be good deals on either of them, with store cards; for instance, you might get good introductory offers, there might be 20% off. It's the same message though, know what you're doing, compare the APR, if you think it's worth taking out be careful and read the small print in the boxes.

KK: And presumably if you're thinking of making a purchase in a particular store it does work to your advantage if they're sending you offers and stuff like that? It's another perk to having that credit.

AH: What this is all about is consumer choice. There's lots of choice on the market, think about what you're going to buy when you're looking for credit.

KK: Anything to add to that Ray?

RW: I think just answering Cordelia's question, "Are they as safe?" then fundamentally in those terms there's no difference between something that has a bank's name and something you get that has a retailer's name, because they're all basically backed up by large financial institutions. In terms of their legal status, and what right you get, they're exactly the same. I'd agree fully that the same message applies.

KK: Joe says, "Can banks and credit card companies change interest rates and costs without notifying consumers or do they just subtly change the statements and things? Are they obliged legally to let you know before it happens?"

AH: That's easy. No, they can't do it, part of the small print we talked about before means there are no hidden surprises. What your credit card company will do, is it will write to you, contact you or send you an email if you're that technologically advanced, it will say it's changing your interest rate, and some companies plaster adverts in the press. So you'll know when your interest rate changes.

KK: So that's another reason to make sure you're aware and informed about what's going on?

AH: Exactly. And when that rate goes up, think about shopping around. Think about dumping that card and think about moving around.

KK: And when it goes down? Still shop around because everyone else might be going down too!

AH: Exactly, or you may have a good deal so stick with it.

KK: Right. Liz has said, "What if you have health problems which prevent you from being able to manage your debt?" We've all come across emergency situations which mean things aren't as you predicted, what if you've taken out a credit situation and your financial circumstances change? Ray, what do you say to that?

RW: Well I think it's something that we touched on before. Tell the lender that your situation has changed, that you won't be able to make the repayments that you were making. It's worth sitting down and reviewing your financial position properly to see how much you can afford to pay, and then going forward with a proposition to the credit company and say, I can't afford to pay for example, £100 because I've got health problems, my income is coming down. Seek advice; go to some of the people we spoke about earlier. The first thing to do is to try and reach an arrangement with the credit company. It depends obviously on how long the health problem is likely to last. One of the other areas is if someone is made redundant obviously they lose their job, they lose their income. The only thing that I would say to do is to go and talk to the credit provider and say look, I no longer have an income, I can't afford to pay this, can I pay it over a longer period of time?

AH: I completely agree with all that. Remember that your lender will want to work with you. They'll want to make sure you can cope with it. It'd not in their interest to be nasty and horrible to you, but the thing to bear in mind, when you're doing this budgeting, remember that things can change. Sometimes we lose our jobs, sometimes we have health problems, sometimes we have relationship break-ups and all of those changes in your life affect the way you get money and the way you make money, so bear in mind that what's happening today may not be what's happening tomorrow, so be a bit more cautious.

KK: Presumably as most of our parents used to say, it's worth putting some money aside for a rainy day just to cover those eventualities. It's not always about living life to pay the next month off, if you can save in advance.

RW: I'd agree with that fully. One thing I'd implore people not to do is to try and borrow to get themselves out of problems. If they think they have an obligation they can't meet because of a change of circumstances it's not a good idea to borrow to cover that. There have been situations where people will have done that and all that happens is that things get worse and worse.

KK: It's that snowballing effect, which is frightening. Well talking of those kinds of effects, we've got Carol here who says, "I'm usually very organised about buying my Christmas presents but this year I've left it until the last minute. What do advise about Christmas shopping, how do I do that without running up huge credit card debts?" My advice would be to hand make some Christmas presents at home, do some baking, or just tell everyone that Christmas is cancelled! What would you guys say?

RW: I don't think the fact that you have X number of days changes the approach; you've still got to shop around to get the best deal. People will shop around if they're going to buy furniture or an electrical item, it still applies. Just because you've got a few days doesn't mean the credit deals are any different. Don't be rushed and take the first thing, you've still got time.

KK: And think about what you, reasonably, can afford with your income. The crucial thing is not to overspend.

AH: Don't panic! As someone who hasn't even started shopping yet, ten days sounds like plenty of time to me. Think about what you're doing and don't feel pressurised.

KK: There's a lot of pressure on consumers to feel that they have to buy an mp3 player or this or that for their cousins or their dads but actually the crucial thing is to live within your boundaries isn't it?

RW: But also don't feel pressurised into taking a deal, if someone is saying to you, you need to take this deal because you haven't got much time, that's a good reason to walk away, because people that are offering you good credit deals will not tend to try and force your arm up your back.

AH: And the deal will still be there tomorrow.

KK: Yes, but the money has got to be there to pay for it. Adam says, "If I make purchases on my credit cards am I being penalised if I pay it off every month?" Is there still a cost involved if he's paying his bill every month?

AH: In most cases the answer is no. If you're paying your credit card every month, then it's interest free in effect.

KK: So it's a bit like Edward?

AH: Really good money management.

KK: Ray, would you agree that that's good money management?

RW: Excellent cash flow management. You're basically getting free money for whatever the interest free period is. So you get 28 days to pay or whatever, you've had the money 28 days earlier; you're getting that for nothing. You can buy your goods, you can put your money into a safe savings account and get some interest on that, and you can pay your credit off at the end of the period.

KK: Elle says, "Is it best to stick with one banking institution across the board, with current account and credit cards, or should I be shopping around and getting different deals with different people? Are there advantages to sticking with one?

AH: Some people know the convenience of staying with one bank, your parents could have had the same bank, but think about shopping around. You often find that rates vary with different institutions. Use the internet to find the best deals for you.

KK: So you're not necessarily better off?

AH: Doesn't follow at all. You don't have to have your mortgage the same place you have your credit card and your current account, your loan, they are different products and different rates apply. Think about them as products you buy from a supermarket: shop around.

KK: That's the key advice here, running through all those questions and answers, shop around and get the best deal for you. Ben has sent us a question, "Is it better to take out a small loan as opposed to using a credit card?" That's similar to a question we had earlier. It's very difficult to offer specific advice to individuals without knowing much more about them. Is there generally a weighing out scale you use for when circumstances would be better for one or the other?

AH: Look at the APR. You can't compare apples and pears but it gives you a pretty good idea of which products are going to be better for you. And they do different things; your credit card is going to be better for frequent spending on different types of items. Think about taking out a loan if you want to buy one particular thing, if you want to buy a car for instance. Taking out a higher purchase agreement is a great way of buying a car. Think about what you're buying and also think about the kind of credit, it's a separate product, it's a separate bit of the deal to think about.

RW: I'd say see how much it's going to cost you. What are you buying? How much are you spending? How quickly are you going to pay it?

KK: And are you happy with the final cost of the product? Because ultimately that's how much you're actually paying for the car.

RW: We've just been talking about Edward and others who are experts at this sort of art of not paying for anything, so if you're going to repay your credit card in a month or two and that's it, and you're not using the credit card again, then that may be better for you than a personal loan. If you are going to continue buying on your credit card, it may be better, for certainty, to get a personal loan so you know how much you're going to pay over six months or a year.

KK: Assess the marketplace, that's the key message we're getting here too. I think we've got one last question; Robin wants to know, "How can I best calculate what level of credit I can commit myself to?" How do you go about looking at your incomings and what you can afford credit wise, is there a quick way of working that out?

RW: Absolutely, go to www.oft.gov.uk and you will find a budget planner in there, which covers virtual everything, much to my horror when I put my own details in there!

KK: It is quite frightening isn't it, we all do over-stretch ourselves!

RW: It will tell you how much on a monthly and quarterly basis you've got in terms of disposable income after you've met all your commitments in your normal spending. Use that as a basis to see how much you can afford to spend or to put towards credit repayments, so what sort of credit you are able to take out.

KK: Well I think that is fantastic advice, thank you both very much for joining us; Ray Watson and Ashley Holmes here as part of the Office of Fair Trading campaign. If you've got more questions you can look at www.oft.gov.uk/consumer/credit. Don't forget, you're choosy about your shopping, but you must also be choosy about how you pay for it. So if you're running up credit, think about the added cost for you, that's what's really, really important. In the lead up to Christmas and any other time of year. Thanks very much for joining us.