How much are people willing to get into debt for Christmas?

As the cost of living increases, it’s understandable that UK residents are more and more concerned about their finances and how to cope over the next few months.

Many are wondering how an increase in financial stress will impact the upcoming Christmas season. With this in mind, Penfold has investigated how much debt people are willing to get into this Christmas.

Rising Costs to Impact Festivities

Winter can be a stressful time for a lot of people; with rising energy bills and a calendar full of events. But will rising costs impact our festivities?

Penfold has surveyed 1,000 individuals from across the UK to see if their finances will impact mental health this winter.

When respondents were asked if they were worried about affording their Christmas plans 80% were worried, with 36% extremely worried.

In 2021, average spending per head during the Christmas period was £1,207 and it seems like we could see a similar number this year with 39% of consumers saying they intend to spend the same amount of money on Christmas shopping and celebrations.

Surprisingly, 1 in 5 Brits said they plan to spend slightly more on their Christmas shopping compared to the previous year.

Financial traps of Christmas time

People often feel driven to spend more money than they need in order to make the holidays feel special. According to a YouGov survey, 64% of UK households overspend on food and 60% do so on gifts.

This year, more people than ever will feel like they need to take out loans just to get through the holidays.

Whilst Christmas is likely to be a squeeze this year, many may be tempted to take out loans in order to maintain the festive experience they’re used to. However “easy” finance options are risky and cost more than they're worth.

Payday loans, shop credit cards and 'buy now, pay later' schemes are all now easily available and often found at checkout for most online brands. The top financial traps in the UK are:

1. Black Friday Deals - Over 1,000,000 searches each November

An estimated £3.95 billion will be spent by Britons on Black Friday and Cyber Monday.

With stores dropping prices to “historically low levels” for just one day, Black Friday enthusiasm gives the idea that every bargain is worthwhile, making it necessary to step over other customers to get to them.

However, according to research by Which, this isn't usually the case. Six months before Black Friday, 85% of the items had also been the same price or less expensive and only three of the 119 products monitored were at their absolute lowest price on Black Friday.

If you're thinking about participating in this year's Black Friday sales, make sure you look out for fake discounts.

2. Credit Cards - 91,000 monthly searches

During the Christmas shopping season, shops frequently try to convince you to sign up for store credit cards.

Signing up might possibly qualify you for a discount. Sadly, these cards frequently have exorbitant interest rates and subpar rewards.

According to research conducted by Money.com, nearly 1 in 4 Brits said they would use their credit cards to make purchases during Black Friday. In November 2021, the monthly Google search for the term ‘credit card’ was the highest of the year with nearly 100,000 searches.

3. Payday Loans - 82,000 monthly searches

Also known as cash advances, these are short-term loans with fees and interest rates that range from 100% to over 400%.

These loans are expensive to pay back compared to other forms of lending. This November, consumers will employ personal loans known as "Black Friday loans" to purchase expensive products that are frequently on sale or in high demand on Black Friday.

Loans are typically utilised for more expensive Black Friday items that buyers must pay back over time. Additionally, some consumers take out Black Friday loans to pay for furnishings or technology they can't afford or buy most of their holiday gifts.

Any money borrowed must be repaid with interest, and it's not always simple to keep up with monthly payments if you have a loss of income, lose your job, or encounter unexpected bills long after Christmas.

4. Buy now, pay later phenomenon - 30,000 monthly searches

In November, on average, there is a 28% increase in demand for BNPL methods of payment.

According to recent data, 60% of people have utilised BNPL services in some capacity. Yet, 66% of consumers think using BNPL services is "financially dangerous."

According to new data, nearly a third of consumers who utilise 'buy now, pay later' credit report that loan repayments have grown "unmanageable" and that the cost of living crisis has sent them into a debt cycle.

Younger generations are most likely to use BNPL schemes as 50% of Gen Z and 54% of Millennials are revealed to have used these services, compared to just 37% of Gen X, and 23% of Baby Boomers.

How to budget responsibly

As lists are made, discounts are sought, and crowds are anticipated, Christmas shopping has become a national sport for many. When money is tight, the holidays are more stressful than enjoyable, and some individuals dread the season out of fear of piling additional debt onto already maxed-out credit cards.

Although you shouldn't spend more than you can afford, it can be useful to know what proportion of your money is spent on Christmas.

1. Write down a list of items you have been waiting to get before Black Friday or the Christmas sales start to eliminate spontaneous splurging
2. Keep a spreadsheet for your Christmas budget (including dinner, events and gifting) to ensure all expenses are expected
3. Scale back on unnecessary expenses such as gifts for non-immediate family

If you do take out any financial loans this period remember*:

• Your debts may mount up quickly if you are unable to pay back what you borrow. If you have poor credit, you can be subject to high-interest rates, and it may be challenging to pay off all of your debt once it has accumulated
• Your credit score may be impacted if you miss a card payment or allow debt to accumulate. Future credit applications may be more difficult as a result
• When selecting a credit card, you should consider other included figures, not just the interest rate because there may be additional fees. If you miss a payment or exceed your credit limit, your provider may charge you, which is problematic if you're already in the red

According to Chris Eastwood at Penfold, a Christmas debt hangover can have a noticeable effect on your savings for the new year ahead;

“Debts tend to come with high-interest rates and can result in you paying far more for items than their original retail price. As a result, it’s recommended that you pay off any debts before you start saving again. The bigger your debts, the longer this will take to pay off, affecting your ability to save. By avoiding the temptation to take out credit cards or 'buy now, pay later' schemes, you can invest your savings wisely, adding that money to your pension, accruing compound interest and securing your financial future.

No matter how much you spend on Christmas, if you haven't budgeted for it, the extra cost could put a strain on your finances. You can save the required amount each month by estimating your Christmas spending based on your prior year's purchases. Put money from each paycheck into a separate account and refrain from using it after figuring out your Christmas budget and how much you must save each month.”

*Penfold does not endorse the use of any of the products detailed in this article, any credit that is taken out is at the risk of the customer.