Does God exist? Are there faeries? We cannot have certainty in the matter, so we will evaluate postulating such entities as a good or bad explanation.
There are two important varieties of claims. One postulates an entity that does something. Santa is actually supposed to deliver presents, and to visit every house. These claims are uncommon because they can be falsified by observation (like watching bad parents fake Santa's visit). Some of these claims, like the tooth fairy, fail because they are refuted by observation. But some do not. One might see a burning Bush, and say that it is God's work. Upon observation, the bush behaves just as the believer has said it will. The problem here, is that the "God" being observed hasn't got any properties other than those observed ... He's acts just like a bit of fire on a bush. Or, the believer might say He's up in heaven, but the bush acts as if He were simply a bit of fire, and this brings us to the second variety of claim.
The second variety of claim involves attributing something to an entity that functions exactly as if the entity did not exist. This approach fails because it adds a complication (the entity) to our explanatory framework, without explaining this complication. For example, we might wonder where the universe came from. And we might want something better than is offered by modern physics. So, we might postulate that God made the world, because this seems to answer the question. However, all it does is deflect the question. Now we wonder where God came from. And if God is a complex enough entity to create the entire universe, then this question is even worse than the previous one (that we had before we postulated God), because we now have even more complexity to explain than before. It also violates the Unexplained Complication rule -- why should there be a God rather than not? This is unexplained.
One strategy that can be useful is to ask someone postulating such an entity, "How can I differentiate you from someone who made up an entity?" All the believer can really do is tell you to have faith, which is not a valid reason to think something true.