Clear the festive hurdle

The Christmas spending splurge can lead to a credit-card headache at this time of year. A good New Year's resolution is not to let debt get out of hand in the first place. But the reality is that many people struggle to pay off their card debt, in full, by the due date. More than 70 per cent of the debt on credit cards is accruing interest.

What many people do not appreciate is that if the debt is not paid off in full by the due date each month, the interest applies to the debt going back to the purchase date, rather than from the end of the interest-free period. With a cash advance, the interest rate applies from day one. Interest rates on credit card purchases are generally between 14 per cent to 20 per cent a year, but can be higher. The only way to avoid paying interest is to pay off the credit-card debt in full by the due date and avoid making a cash advance. Note that the interest rate on cash advances is usually higher than the purchase interest rate.

Some people even have debts on their credit card or cards that were racked up over Christmas 2011. It is not a smart way to go. People could take advantage of ''balance transfer'' offers, where the credit-card debt is transferred to a zero- or low-interest-rate card. That is not a solution, but it buys time without having to pay interest, or not much interest, while working on reducing the debt. These cards have a zero or low interest rate that applies for a limited time, typically six months or so, after which they revert to the purchase rate or the higher cash-advance rate. The zero or low rate usually only applies to the balance that has been transferred from the old card, not to new purchases.

Once the credit-card debt is cleared, the better way to go is to use a debit card for everyday spending, with the credit card clear for emergencies. With a debit card, you are using your own money in the transaction account that is linked to the debit card, rather than borrowing at very high interest rates.

Only enough money to cover everyday spending should be in the transaction account, because the accounts pay very little interest. Longer-term savings would be better held in an online saver account or a term deposit that pays higher rates of interest.

Justin Bieber recently made the leap into the financial-services world, endorsing a prepaid debit card. Now the question is whether "The Biebs" will succeed where others have failed—making prepaid cards cool among the teen set.

Financial firms have placed plenty of emphasis on prepaid debit in recent years, touting the payment method as a tool for parents to keep Junior's spending in check—and perhaps teach him a lesson in money management. In 2010, American Express introduced its prepaid PASS program and joined with with iVillage, the popular women's website, to get the word out about "the talk"—as in speaking to kids about personal finance.

More recently, MyPlash, a teen-oriented, MasterCard -affiliated prepaid program, sponsored a supercross team to spread the message that "financial responsibility is always a winning proposition."

And then there is the Bieber-approved SpendSmart card, which comes courtesy of BillMyParents, a San Diego, Calif., card issuer. The company said it hopes to leverage the audience of a pop star who has sold 15 million albums and boasts 30 million Twitter followers.

These programs all speak to the same idea: Teens spend more than $200 billion annually, according to researcher EPM Communications, but most parents want to place curbs on all that buying. A prepaid card can help since purchases are limited to whatever dollar amount parents choose to put on the plastic. Plus, as compared with cash, cards give parents a better view of where the money goes.

Financial institutions have their own reasons for pushing prepaid, including recent federal legislation that limits in some cases what fees they can earn from traditional debit cards—but not from prepaid ones.

Still, prepaid debit cards targeted at teens haven't broadly caught on, says Tim Sloane, a vice president with Mercator Advisory Group, which researches the prepaid market.

Part of the reason, Mr. Sloane believes: Kids may not like mom and dad seeing exactly how they spend their allowance. And parents may balk at the expenses associated with prepaid cards, from monthly maintenance charges (as high as $10) to ATM fees (up to $2.50). "A prepaid product that requires simultaneous adoption by parents and teens may raise the bar too high," Mr. Sloane says.

Financial pros say parents can accomplish similar financial goals with a cheaper option, such as a low-fee or no-fee credit card with a modest spending limit. Parents can open a joint account with a child or add the child as an authorized user to an existing account. The card may not have a pop star's name attached to it, but it also won't carry as many fees. And the lesson in using credit the right way can be just as invaluable in the long run, says Larry Rosenthal of Rosenthal Wealth Management in Northern Virginia.