Save thousands on credit charges

Charity Credit Action says the average UK household owes £7880 on credit cards, personal loans, overdrafts and finance agreements. Adding mortgages takes the total to £55,483.

The typical cost in interest alone is £2396 a year, almost one-tenth of the average family's after-tax income.

And the situation looks set to get worse. Half of all adults say they struggle to make ends meet until payday, and many are turning to one of the most expensive forms of borrowing to tide them over.

Around 1.2 million people took out payday loans last year, and a survey by the Association of Business Recovery Professionals found four million more expect to use them in the next six months.

Association council member Louise Brittain says: "With their sophisticated TV advertising, it's hard to avoid the lure of the 'quick and easy' payday loan."

But while the promise of minimal credit checks and virtually instant cash may be appealing, the costs are extortionate.

Annual interest rates typically range from around 1700% to 4200%, meaning a £300 loan repaid over a year could cost a staggering £12,600. Few people actually pay this much, as these loans are designed to be settled within a month, but many are charged much more than they expect.

According to consumer organisation Which?, one-quarter of payday borrowers face hidden charges such as high fees for reminder letters, and one in five can't clear their debt on time. More than half are encouraged to sign up for further loans, and almost half eventually take one to repay the original debt.

Which? executive director Richard Lloyd says: "At its worst, this booming £2 billion industry can be seriously bad news for borrowers who are struggling to afford food or pay their bills.

"People are getting caught up in a debt trap, whacked with high penalty charges, or encouraged to roll over payments and take out more loans at inflated rates."

There are, of course, many other ways to borrow, but these can also be unexpectedly expensive. The Bank of England's base lending rate is just 0.5%, yet interest charges vary hugely depending on the lender, the type of credit and the borrower's financial history.

A £1000 credit card debt cleared over a year would cost a total of £1038 with a Sainsbury's card charging 6.9%, available only to those with the best track record. It would cost £1353 – £315 extra – with a Vanquis card at 59.9%.

Meanwhile, someone with a good credit record could borrow £3000 over three years from the Clydesdale or Sainsbury's Bank at 12.8%, giving a repayment cost of £3592.

If they went to Amigo, they could pay 62.1% for the same loan, making the credit cost £5797 – £2205 more.

To find the cheapest borrowing options for all credit profiles, see the panel on the right.

WHEN Kevin Kennedy needed a loan to help pay for his stepdaughters' communion dresses, he decided not to go to a high-street bank or payday lender.

The 31-year-old council employee from Hamilton had previously overdrawn at his bank when he needed extra cash and knew how expensive small loans could be, so this time he turned to credit union, Scotwest.

Because he already saved through the union's payroll deduction scheme, he was eligible for its Fast £500 loan to cover the cost of nine-year-old twins Loren and Erin's outfits.

Kennedy says: "All it took was a phone call and the decision was made later that day. The rates are really competitive and I couldn't recommend it enough.

"Unlike other short-term loan services, paying it back is really manageable. It's set up so the repayments are deducted directly from my wages, meaning I don't need to worry about missing them."

He and his partner, 31-year-old waitress Clare McPhillips, who is also mum to 11-year-old Adam, are now thinking about their future.

Kennedy says: "We've recently got engaged and I'm sure the express loan service will come in useful again in the lead-up to our big day."

The most competitive deals are available only to those with unblemished financial records, but that isn't to say those with less perfect pasts can't get credit at reasonable rates.

Use price comparison websites to find the best offers to suit your history and never borrow more than you absolutely have to.

Credit cards

Look for: A long interest-free period, as it is the cheapest way to borrow. Halifax, Barclaycard, Virgin, NatWest, Sainsbury's and Bank of Scotland offer between 15 months and a year on new spending and balance transfers.

After this, rates typically rise to 17% to 19%, so if you won't clear your debt in this time, consider a card with a low long-term rate. Sainsbury's, Barclaycard, Co-operative Bank and Capital One have standard rates below 10%.

Avoid: The more expensive "credit repair" cards for those with a poor financial history. Rates start at just under 30% from providers including Barclaycard and Capital One, but rise to almost 60% at Vanquis.

Personal loans

Look for: The lowest interest loans – they are cheaper than many long-term credit card rates. For those with a good record, borrowing £3000 over three years starts at 12.8% with Clydesdale or Sainsbury's. Borrowing £5000 over five years starts at 7.7% at Sainsbury's.

Those with a poorer history are likely to get the best deal by joining a credit union, where rates range from under 10% to around 27% depending on loan size.

A £500 loan repaid over a year from Glasgow Credit Union, where the rate is 24.9%, or the Scotwest or Capital unions, at 26.8%, would cost just over £560, compared to £910 at Provident Personal Credit, where the rate is 272%.

To find your nearest union, log on to abcul.org.

Avoid: Payday lenders – annual interest can be as much as 4200%.

Overdrafts

Look for: An agreed limit – rates start at 15.9% with the Co-operative Bank, First Direct and Smile.

Avoid: Unauthorised borrowing, where costs can be close to 30% plus hefty penalty charges.