With tough financial times both behind us and ahead, many people are dreading the thought of Christmas rather than relishing in the warm spirit that the holiday season brings. This year has seen some of the harshest government cuts since Margaret Thatcher was in power. Meanwhile, petrol and diesel prices are sticking at record highs, energy suppliers have hiked gas and electricity prices by an average of 19%, and there have been warnings that inflation rates could increase even further.

How will all of this impact on our Christmas spending? Will people be more inclined to tighten up their purse strings to avoid causing themselves more financial difficulty?

Christmas spending

Christmas is an expensive time of the year, and it’s not just the gifts that are costing us money; we spend a small fortune every year on the Christmas dinner, decorations, parties, going out, clothes, travelling to see family, and much more.

Research by The Co-Operative Bank found that in efforts to cut back on spending in 2011, 53% of people are no longer going out, with 14% opting to attend house parties instead, while 57% have stopped eating out. Will these habits continue through the Christmas period?

In 2008, GfK NOP established that 38% of people were going to fund their Christmas spending with credit, with another 19% using savings. The research revealed that only 65% of consumers would actually fund Christmas with their normal income. Will Brits be doing the same for Christmas 2011?

With every penny being squeezed further, UK consumers have 2% less disposable income available these days to spend on Christmas. Without having the cash in their bank accounts will consumers turn to spending on plastic instead?

December spending down

Figures from the UK Cards Association suggest that British consumers are actually wary about building up too much debt as the number of purchases and the value of spending has actually decreased every year since 2008. Credit card spending was at £11.3bn in December 2007 but last Christmas was down by 8%* to £10.4bn. In stark contrast, the amount spent on debit cards has actually increased by 18.2% (£3.8bn) over the past four years from £20.9bn in 2007 to £24.7bn in 2010.

Mark Bowerman, a spokesperson for the UK Cards Association, said: “Given the continuing economic downturn we do not expect to see an increase in the use of credit cards this December and the trend has been for people to do their spending on their debit cards rather than their credit cards.”

ICM Research found that 39% of people stated that they would be spending less money on Christmas this year than in 2010, something which was far truer for older people than younger age groups. This research, along with analysis from the UK Card Association, would suggest that more people are cutting back on their Christmas spending this year and only spending the money they have, rather than turning to alternative forms of credit.

Credit cards could help

Spending on credit cards is not as bad as some people fear, but you do have to be disciplined and stick to a budget. Most credit cards offer a grace period between the point of sale and the time you are required to start paying interest on the balance. If you pay off the balance in full before this time is up, you will not be charged any interest.

This could prove to be particularly useful if you use a rewards credit card; these cards offer rewards in return for spending on the credit card. The rewards can vary but you will typically see cashback, gift vouchers and airmiles as some of the rewards offered.

To make the most of a rewards credit card you will need to use it wisely throughout the year. By this I mean that you would need to get in the habit of using it to pay for things you would have ordinarily paid for using your debit card or cash (but only spending the money you know you have and stashing the cash to cover the cost of what you paid for on your card in a savings account), earning the rewards as you go. Then, the most important step is to make sure you pay off the full outstanding balance each month, with the money you stashed, before you are charged interest. When you claim your rewards you could either use them as Christmas gifts, or redeem them against your own Christmas shopping.

Plus, you will earn interest on the money you stash in your savings account and get a tick on your credit report each time you make your monthly credit card payment by the due date.

Alternative ways to spend

Debit cards and credit cards are not the only way to spend this Christmas; prepaid cards are an excellent alternative for consumers looking for a way to budget. Prepaid cards are similar to pay as you go mobile phone in the sense that unless funds have been loaded it cannot be used. This means that cardholders can load their pre-budgeted amount on to the card and hit the High Street without any concerns of over-spending, emptying their bank account or getting an unwanted credit card bill.

Consumers backing away from credit

It seems that Brits are doing everything they can to avoid having huge outstanding balances on credit cards in the New Year by using money they have available rather than seeking other forms of finance. It is predicted that credit cards will be used less again this Christmas as the continued difficult economic climate makes it difficult for consumers to access credit and make the repayments. This is a change in direction from three years ago when four in ten consumers used credit for splashing out at Christmas.