Money Insider: Cold-shoulder from the bank? Only consider payday loans as a last resort

Credit cards or guarantor borrowing can be less painful – and help repair debt-history damage

Borrowing rates may be low at the moment, but if you haven't got a good credit history, it's likely that your application for credit will be declined.

With adverts for payday loans wherever you turn, it's no surprise that this is often the first port of call when the bank says no. However, just because your credit record isn't up to scratch, you don't have to accept crippling payday interest rates of 4,000 per cent-plus annual percentage rate (APR).

Although most credit-card companies will turn you down if your history shows you've missed a couple of credit or loan repayments, there are specialist credit cards that give you the chance to repair your credit record. Cards from Luma, Aqua and Vanquis give people who have struggled with debt previously or who have a limited credit history an opportunity to get back on track.

The interest rates are higher than standard credit cards but a fraction of those charged for short-term, payday loans, with Vanquis charging a representative APR of 39.9 per cent and Luma 35.9 per cent. To put the costs into perspective, borrowing £400 on a credit card at 39.9 per cent APR will cost you £13.55 in interest for one month, whereas the same sum borrowed from Wonga will set you back £125.48 in interest and fees.

If you borrowed £1,000 over 12 months on a credit repair credit card from Luma at 35.9 per cent APR, it would cost you £100.41 per month and you'd pay back a total of £1204.92 – i.e. an interest charge of £204.92.

To rebuild your credit status, you need to demonstrate a history of using a credit card responsibly, so if you make payments on time every month your credit score will gradually improve.

You won't transform your credit rating overnight but it's a chance to prove you are financially responsible, and in time could enable you to borrow again at some of the lowest interest rates offered by banks and building societies.

Another more affordable but less well-known option is a guarantor loan from Amigo, where you can apply for credit of up to £5,000 at a representative APR of 49.9 per cent.

To qualify, you need to find a creditworthy friend or relative to act as guarantor for your loan. This means that if for some reason you are unable to pay, the guarantor becomes liable for the outstanding balance.

The interest rate is far cheaper than going down the payday loans route, plus Amigo loans are flexible, in that you are able to make additional, ad hoc reductions without penalty.

Another avenue worth exploring is borrowing from a local credit union.

With more than 400 credit unions across the UK and over 1 million members, these local financial co-operatives, owned by the people who use them, offer guidance and help you try to manage your finances.

Credit unions will encourage you to save money, but they also offer loans at affordable rates too.

Although you're unlikely to be able to borrow more than £1,000 until you've proved your ability to save, it's an excellent way to manage money for those who can't borrow from high street banks. To find a local credit union visit or phone 0161 832 3694.

Many credit union loans will cost you no more than 1 per cent per month (12.7 per cent APR) on the reducing balance of the loan. On that basis, if you borrowed £1,000, you'd pay back £88.15 per month over 12 months and the total amount repayable would be £1,066.20 – i.e. interest charge of just £66.20.

If money is tight, a high-interest, payday loan could see you end up in a much bigger financial mess, so only consider it as a last resort.

New rewards cards from Sainsbury's Bank

Sainsbury's Bank upped the ante on its rivals this week with the launch of two new rewards credit cards. There's a choice of a Nectar rewards card or a Cashback card, both charging just 7.8 per cent APR representative, much lower than the market average of 17.6 per cent APR for cashback and rewards cards.

With the Nectar card, you can earn points worth 5 per cent of your Sainsbury's shopping for the first three months and 2 per cent thereafter. The other option can earn 5 per cent cash back on your Sainsbury's spend for the first three months.

Ongoing, you can earn £5 cash back each month if you spend at least £500 on the card, of which £250 must be at Sainsbury's.

These competitive offers will give Sainsbury's main rivals, Tesco, Santander, Barclaycard and MBNA, something to ponder.