It's the season to be jolly - but keep an eye on your finances or it won't be just the turkey that's stuffed, reports Jeni Harvie.

The stores are breaking out the Christmas decorations, the catalogues are pushing their gift lines and the pressure to buy is mounting. There are the presents for the family, the bottles of bubbly and the new outfit for New Year's Eve. It is a time when good sense, particularly good financial sense, is thrown to the wind. The bank balance plummets and the plastic gets a good workout.

But the time of reckoning is just weeks away. January comes around, the bills roll in and there is little or nothing to cover them.

Richard Brading, a credit advocate for the Wesley Mission's CreditLine, calls it the post Christmas hangover. "The three months after Christmas is our busiest time of the year. People are unable to pay their Christmas debts, they are falling into arrears and the debt collectors are calling. It's like the hangover after you've drunk too much."

And it seems aggressive retailers, media hype and the ubiquitous credit card are largely to blame. "As Christmas approaches, advertising intensifies as retailers look for a boom period," says Brading. "At the same time there is this social expectation that people will spend a lot on entertaining and gifts. The pressure [to spend] is enormous.

"This all combines with a massive marketing push by credit companies. A lot of the card issuers will pretty much hand over a card to anyone. The worst offenders are in shopping centres, handing out vouchers and application forms. It can be a very dangerous trap."

Unfortunately, many people fall into the trap, running up huge bills that can take years to clear. "The sort of credit people can get is substantial, up to $10,000," says Brading. "And many people have half a dozen credit cards, which can translate into $50,000 or more of unsecured debt. Once they reach the limit, even repaying the minimum monthly balance becomes a battle."

Paul Gillett, a lawyer with the Consumer Credit Legal Service in Victoria, says the past few years has seen "an unprecedented increase in the use of credit, and credit cards in particular".

"There is convenience associated with credit cards but there is also major risk and our service sees that side of it. We have seen instances of pensioners who have not had any increase in their income and yet have gone from a $2000 limit to a $20,000 limit. This is staggering."

Interest-free periods can be a trap, he says. "Interest free is fine as long as the debt is paid off within that period. Often people are not given enough information about what will happen if they don't pay the account [in that time]. People believe they are clearing the debt [by paying the minimum monthly payment] but they end up paying it off over four years and are slugged interest at 25 per cent. That is a famous trap."

Narelle Brown, the co-ordinator for the CCSA-Ryde Eastwood Financial Counselling Service, Sydney, agrees that before Christmas there is a concerted effort by financial institutions to entice customers to take out additional cards, increase their credit limit or even draw down on their home loan.

"They say 'Make it a special Christmas, and this is how you can do it,' " she says. "I don't think people really understand how interest is calculated on credit cards. For a $8000 credit card debt with a 2 per cent minimum payment each month at 17 per cent interest rate, it will take 562 months to get rid of the debt. In that time $18,591 will have been paid in interest.

"This is a significant amount and everyone should be drilled in [how interest is calculated] when they first get a credit card. Many people think it is like a personal loan, where if they make a payment each month it will clear in four to five years."

Australia's high debt levels are well documented. Earlier this month, the Reserve Bank revealed that housing credit in September rose by 2.1 per cent - the biggest rise since 1984 and one of the largest increases on record.

Personal credit, including personal loans and credit cards, rose by 2.2 per cent, the biggest monthly gain since April 1990. It is estimated that households owe $517 billion, more than three times the $155 billion owed a decade ago.

And now we are entering the danger zone, at a time when interest rates are climbing higher. Last Christmas Australians put $11 billion on credit cards and spent another $5.1 billion through the Eftpos system. It made for a pretty sobering new year.

A study of consumer debt, prepared for the Financial Counsellors' Association of NSW by Margaret Griffiths and Bill Renwick of the University of Newcastle, found that two-thirds of the overcommitted come from single adult households, more than 80 per cent had incomes below $30,000 a year and more than half relied on government benefits.

The fact that it is often the poorest people who run up the huge bills disturbs psychiatrist Jean Lennane. "It is those people who can least afford it and suffer from low self esteem that feel the most pressure to get in there and spend," she says. "The thinking is that the bigger the present, the bigger the status and worth of the giver."

Lennane says people get into all sorts of trouble trying to find the money to buy expensive gifts, including gambling. "I have seen it many times," she says. "The only way they feel they can get enough money to get them through Christmas is to gamble it. Of course, this just compounds the situation."

So what should people do? How can people avoid the Christmas credit crush? "Obviously, it is advisable for people to spend only money they already have," says Karen Cox, a co-ordinator at the Consumer Credit Legal Centre.

"If you do use credit, use the lowest interest rate option you can and stick to a plan, draw up a budget and avoid impulse buying. If necessary, lower the limit on your card to avoid the temptation to overspend or use a low-limit card.

"If you use a line of credit or a redraw facility secured by your home you must think in terms of how many years you may be adding to your mortgage. The interest rate might be lower than on a credit card, but unless you pay it off quickly you will pay more over time. It can be a false economy.

"People should also remember that interest rates are on the rise again, and if you get into difficulties and are using your home loan, your house is immediately at risk."

Peter Hansen, of the Credit Union Services Corporation, advises people to shop around for the right card. "What is the point of having 55 days interest-free if you are not paying the debt off each month?" he says. "These cards have high rates of interest and annual fees. They might have a great rewards program but that's no good to you if you can't redeem the rewards."

But if it gets out of hand, don't despair. The NSW Department of Fair Trading and Consumer Affairs Victoria fund credit help lines and many charities offer free financial counselling services.

"We normally have a two- to three-week waiting list," says Brown. "But after Christmas this list blows out to six weeks, which is a long time for people in crisis."

A counsellor will do a full financial assessment of the person's accounts - debts, assets, income and expenditure - and then provide options for change and improvement such as lower repayments, varying contracts or getting a second job. "It's like laying all the cards on the table and the client chooses the way ahead," says Brown.

But before you reach this critical stage, Elizabeth Terry, the president of the Financial Counsellors' Association of NSW, suggests people draw up a financial plan, which sets out all living costs and expenses and balances them against their income. From this you should be able to determine how much money you have to spend on the festive season. "If you don't have the money, you shouldn't spend it," she says.

Colin Lewis, the head of technical services at IPAC Securities, also cautions against spending now and paying later.

"Obviously, it's too easy," he says. "You've got the piece of plastic and you're out there buying up big, but one day you are going to have to pay it back. People buy in December thinking they can repay in January, but when January comes along, the kids are at home and there's a greater level of expenditure on holidays and entertainment. Then there is the return-to-school stuff to buy. All of a sudden you've got a [credit card] bill to pay off and it ends up going into the next month."

Lewis advocates "discipline, discipline, discipline". This involves setting a limit on your spending, using cash as much as possible, and resisting the "lure of special offers".

Finally, he says, "when you buy goods on interest-free periods, be aware that if you don't pay them off in time, the interest can go back to day one and may be charged as a line of credit, ie, interest is charged daily and is compounding.

"People need to ask 'If I don't pay this on time, what is the interest rate and am I borrowing on a line of credit?' Often, finance companies will charge 30 per cent or more in interest. People should understand that the easier the credit is to get, the higher the interest rate charged."

The dance of debt

"We are both earning reasonable incomes, so we use Adam's salary to pay the mortgage while we live off mine," says Tracey. "As soon as we get paid we go on to the internet and allocate the funds to pay off the debts. Almost all the bills go on the credit cards, which are 55 days interest-free, and we pay them off each month."

They are unfazed by the prospect of Christmas, although Tracey says that the fact that they don't have children helps. "We will probably spend an additional $1500 on the credit card coming into Christmas, but we are comfortable with that amount," she says. "We have a credit limit of $4000 on the cards so there is no temptation to indulge."

They also have access to a redraw facility attached to the home loan if they need it. Holidays are also accounted for, with an extended holiday in Asia set down for January and February. "We plan our holidays 12 months in advance and start saving for them then," says Tracey. "We have been putting away about $200 a month."

It's called dancing all the way to the bank.

How to keep out of debt this Christmas

Use cash as much as possible.

Open an account at the beginning of the year and make regular deposits into it that you can draw on at Christmas time.

Don't be tempted to take out new credit cards, extend your limit or use one credit card to pay off another.

Aim to pay your credit card balance in full before the due date. If you don't, interest will be charged on all the transactions for that statement period as well as subsequent purchases. The debt is calculated daily and compounds.

Draw up a financial plan which takes into account all your income and outgoings so you know how much you can afford to spend.

If you decide there is no money available for Christmas presents, make your own gifts (biscuits, jams, craft) or offer your services free (a home-cooked meal, a day of gardening).

An alternative to buying presents en masse is to place the name of each family member in a hat; each person draws out a name and buys a present for that one person.

Take advantage of laybys and specials, but only if you really need the goods.

Help lines

NSW
Consumer Credit Legal Centre (02) 9212 4111/1800 247 890
Credit Help Line 1800 808 488
Credit Line (02) 9951 5544
CCAS-Ryde Eastwood Financial Counselling Service (02) 9858 1377

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