Clear present danger

Walk into most high street stores in the next few weeks, and you'll be bombarded with a plethora of in-store finance deals, ranging from 'interest free' credit agreements to extended warranties and store cards.

Christmas is supposed to be about giving, but - especially if you're buying expensive items like electrical goods, computers or furniture - shopping for it can soon feel like an extremely un-festive financial headache.

Interest-free credit might seem a good reason to come over all generous this yuletide, but tread carefully.

The Office of Fair Trading has been scrutinising such deals over the last year, and has forced a dozen major retailers, including Comet, Dixons, Powerhouse, Courts, Time Computers and Allied Carpets, to withdraw misleading adverts whose bark was considerably more attractive than their bite.

The firms had claimed to be offering 'interest free' credit or 0% APR finance deals. In fact, the agreements in question - which are, in themselves, perfectly legal - involved an interest-free period, after which the balance had to be repaid in a lump sum or installments. Customers who failed to pay by the set date were not only charged interest for the remainder of the deal period - up to three years, and often at a punitive rate of interest - but also from the date they originally took out the agreement.

Not all interest free deals are as exorbitant as this, but always read the small print and make sure you pay off the balance before the deadline.

A similar message applies if you're tempted by one of the many store cards offering credit to Christmas shoppers this year.

Signing up for new plastic may give you special discounts or priority access to the post-Christmas sales, but if you fail to pay off your credit within the interest free period - normally 56 days - check out those interest rates and weep!

A Habitat card comes with a hefty APR of 29%, Harvey Nichols charges 28.5% and Marks and Spencer, 18.9%, for example. John Lewis' store card, with a 6.5% APR, competes with standard credit cards' rates, but no store card offers a six-month 0% introductory APR, which is now standard fare in the credit card industry and currently on offer from Egg, Nationwide, Tesco and Capital One.

Instead of opting for a store card you could find it cheaper to run up an overdraft - assuming you haven't already used up your limit, that is. Some banks now offer cut-price authorised overdrafts to win your business, so it may be worth taking the opportunity to switch.

The equivalent annual rate on an authorised Cahoot overdraft can be as low as 7% for example, and Abbey National and Halifax are offering 8.7% and 8.9% respectively for transferred current accounts for introductory periods.

In fact, even an unauthorised overdraft could be cheaper than a store card - Intelligent Finance offers 25%, for example, and Cahoot 21.9%, dependent on credit rating.

No matter what payment method you use, you'll want to feel like the gift you're about to make is one that will last. But are extended warranties - now offered by most big electrical retailers - worth the expense? In some cases the amount charged is more than half the original purchase price - five year's cover on a ?60 microwave from Comet would cost ?45, for example.

The Office of Fair Trading says it's best to think twice about warranties, especially if you're being pressurised into buying cover there and then. During the first year of its life the appliance should already be covered by the manufacturer's guarantee, so you needn't make a decision about further protection for nearly twelve months.

After the first year, extended warranties are only worthwhile if the appliance is likely to break down and cost a lot to repair.

The OFT estimates that the average washing machine repair bill costs between ?45 and ?65, for example - so if you paid the ?165 Comet is currently asking for a five year extended warranty on a ?315 Bosch, it would need to break down three or four times in years two to five for you to have gained anything.

Bear in mind that a May 2002 Which? survey found that 81% of washing machines don't break down at all in the first six years.

And remember that your home contents insurance may cover you for accidental damage, fire or theft of the appliance. It may be worth considering standalone repair and renewal insurance, although this can prove uneconomical unless the items are fairly expensive. For example Warranty Direct will insure three items, each worth up to ?2,000, for just under ?100 a year.

Of course, life might prove an awful lot simpler if you just bought everyone a nasty jumper and a couple of satsumas instead...