Stop short-term need turning into a long-term crisis

As more Britons turn to credit cards long before the next payday, Chiara Cavaglieri investigates all the options

We all know money is tight but it seems things may be even worse than the headlines suggest, with a quarter of Britons forced to rely on credit cards to cover daily expenses.

It takes the average credit-card holder 21 days after payday to fall back on the plastic, according to Moneysupermarket.com. For one in 10 of this group it takes less than 15 days before their finances vanish and the credit card has to be called upon.

"It's no surprise to see so many people reliant on credit so early in the month. However, unless you plan this properly and know you're able to pay off your balance, this can be a dangerous trap to fall into," says Kevin Mountford, head of banking at Moneysupermarket. But is the credit card the best for short-term borrowing? What other options can to help you over those minor financial hiccups?

Authorised overdrafts

With an authorised overdraft, your bank offers you a safety net on your current account, up to a specific amount, to cover short-term cash-flow problems.

"If you need the money quickly, then an authorised overdraft could be a good option. Most banks can sort out an overdraft there and then if you meet their qualifying criteria," says Michelle Slade from Moneyfacts.co.uk.

Several bank accounts have an introductory interest-free overdraft. For example, Santander's current account offers a 0 per cent overdraft for the first year, but only for new customers. However, if you can't access the free overdrafts, be aware of high interest rates: Barclays charges 19.3 per cent and Lloyds TSB charges 18.9 per cent on their main current accounts.

"A number of providers have also moved to daily charges, which can soon add up. Halifax charged £1 per day on overdrafts up to £2,500 and £2 per day for larger amounts. With no maximum this could soon work out more costly," says Ms Slade.

Unauthorised overdrafts

If you borrow without the agreement of the bank, you could end up paying through the nose. Banks charge up to 30 per cent EAR, with penalty fees of £20 on top.

However, some current accounts do have a buffer zone, allowing customers a small window to go into the red without being charged interest or incurring fees. Unfortunately, the most generous buffer zones tend to be on fee-paying accounts such as the £500 buffer on the Citibank, Citigold account and Lloyds TSB Premier accounts as part of a package costing £25 per month. For fee-free accounts the Co-operative Bank current account plus is the least stingy, offering a £200 buffer.

Credit unions

Credit unions are a good alternative to the banks and will be a much cheaper way for you to borrow money than payday loans. They start from the premise of providing a mutually beneficial financial community to like-minded people. Members share a common bond such as working or living in the same area, belonging to the same church or trade union.

As a co-operative, members pool their savings in return for a reliable rate and that money is then lent out to other members at an affordable rate, with most charging no more than 12.7 per cent APR, the equivalent of repaying £1,067 on a £1,000 loan. Credit unions are far more willing to offer small loans ranging from just £50 – an area the high street banks aren't willing to touch.

However, if you are not yet an established member, you may not be able to borrow straight away. Credit unions are also unlikely to beat the best-buy credit cards and personal loans, but as these products are reserved for the most credit-worthy applicants only, they will be cheaper than many of the products banks offer to rejected applicants. Even better, credit union loans do not carry hidden charges and life cover is included. Find your nearest credit union on findyourcreditunion.co.uk.

Payday loans

Despite being described by some people as legal loan sharks, payday loan companies are increasingly popular with those struggling to make ends meet. The big pull here is the ease and speed with which you can get your hands on the cash. Companies such as TxtLoan, QuickQuid and Wonga offer cash advances from £80 to £1,000 straight into your account in a matter of minutes.

Much is made of the shocking interest rates which can exceed 4,000 per cent when converted to an annual percentage rate (APR), but this isn't always a helpful way to compare costs due to the short-term nature of these loans. If you borrow £100 and have to pay back £17 after 15 days, as with Txtloan, this actually represents an APR of 4,474 per cent, but in reality, paying back £117 could be cheaper than dipping into an overdraft.

While the rates may be slightly misleading, the danger lies in the way charges can spiral if you miss payments or decide to roll over the debt, as many companies encourage you to do. At TxtLoan, if you don't repay your loan on time, an admin fee of £25 is added on day 17 and again on day 27 and you pay interest at a rate of £1.13 per day. If you are still unable to clear your debt by day 46, they whack on another £47 fee and pass on the loan to a debt collector, by which time you owe £247.

"Payday lenders are very available and you typically don't need a credit check. They still represent a relatively small proportion of lending but there is a trend for people to borrow from as many as 20 of these lenders," says Delroy Corinaldi from debt charity Consumer Credit Counselling Service (CCCS).

Offset current account mortgage

If you want to maximise your savings but still have the option of access to it in an emergency, an offset mortgage may work for you. With these you link the balance of your savings and possibly your current account to your mortgage, so that you pay interest only on the difference. If you had a mortgage balance of £150,000 and £10,000 in savings, instead of getting a return on your nest egg, you offset it against your home loan so that you pay interest only on the £140,000.

Because you typically pay more interest as a borrower than you earn when you deposit money into a bank, this is a very efficient way to use your money. And if you're using your savings to trim your mortgage payments there is no tax bill to worry about.

Offset mortgages do tend to be pricier than mainstream loans, although that premium has fallen over the years and there are great deals around. For example, First Direct's interest-only base rate tracker, offered at up to 65 per cent loan-to-value (LTV), currently costs 2.79 per cent and allows unlimited overpayments.

Credit cards

If you have a good credit rating, a card with an introductory interest-free period will give you financial flexibility until payday. Tesco and Marks & Spencer offer 0 per cent interest for 15 months, with the bonus of Tesco Clubcard points or M&S vouchers.

These cards can be a helpful cushion if you find yourself struggling from time to time, but even without interest to worry about for 15 months you still need to pay at least the minimum repayment each month, typically 3 per cent of the balance, or you could lose the promotional rate.

Be aware that ATM credit-card withdrawals are charged interest from day one, typically at about 30 per cent and you'll pay fees of about 3 per cent.

News
Susan Sarandon described David Bowie as
peopleSusan Sarandon reveals more on her David Bowie romance
Sport
Lewis Hamilton walks back to the pit lane with his Mercedes burning in the background
Formula 1
Arts and Entertainment
The new characters were announced yesterday at San Diego Comic Con
comic-con 2014
Sport
Arsenal supporters gather for a recent ‘fan party’ in New Jersey
football
PROMOTED VIDEO
News
i100
News
Bryan had a bracelet given to him by his late father stolen during the raid
people
News
A rub on the tummy sprang Casey back to life
video
Sport
sportDidier Drogba returns to Chelsea on one-year deal
Arts and Entertainment
The Secret Cinema performance of Back to the Future has been cancelled again
film
Life and Style
Balmain's autumn/winter 2014 campaign, shot by Mario Sorrenti and featuring Binx Walton, Cara Delevingne, Jourdan Dunn, Ysaunny Brito, Issa Lish and Kayla Scott
fashionHow Olivier Rousteing is revitalising the house of Balmain
News
i100
Arts and Entertainment
Christian Grey cradles Ana in the Fifty Shades of Grey film
filmFifty Shades of Grey trailer provokes moral outrage in US
News
people
News
BBC broadcaster and presenter Evan Davis, who will be taking over from Jeremy Paxman on Newsnight
peopleForget Paxman - what will Evan Davis be like on Newsnight?
Life and Style
fashionCustomer complained about the visibly protruding ribs
News
newsComedy club forced to apologise as maggots eating a dead pigeon fall out of air-conditioning
Arts and Entertainment
Jo Brand says she's mellowed a lot
tvJo Brand says shows encourage people to laugh at the vulnerable
Life and Style
People may feel that they're procrastinating by watching TV in the evening
life
News
Tovey says of homeless charity the Pillion Trust : 'If it weren't for them and the park attendant I wouldn't be here today.'
people
Sport
Rhys Williams
commonwealth games
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Senior Risk Manager - Banking - London - £650

    £600 - £650 per day: Orgtel: Conduct Risk Liaison Manager - Banking - London -...

    The benefits of being in Recruitment at SThree...

    £18000 - £23000 per annum + Comission: SThree: SThree, International Recruitme...

    Test Analyst - UAT - Credit Risk

    £280 - £300 per day + competitive: Orgtel: Test Analyst, Edinburgh, Credit Ris...

    Trainee Recruitment Consultants - Banking & Finance

    £20000 - £25000 per annum + OTE £40,000: SThree: SThree Group have been well e...

    Day In a Page

    Evan Davis: The BBC’s wolf in sheep’s clothing to take over at Newsnight

    The BBC’s wolf in sheep’s clothing

    What will Evan Davis be like on Newsnight?
    Finding the names for America’s shame: What happens to the immigrants crossing the US-Mexico border without documents who never make it past the Arizona desert?

    Finding the names for America’s shame

    The immigrants crossing the US-Mexico border without documents who never make it past the Arizona desert
    Inside a church for Born Again Christians: Speaking to God in a Manchester multiplex

    Inside a church for Born Again Christians

    As Britain's Anglican church struggles to establish its modern identity, one branch of Christianity is booming
    Rihanna, Kim Kardashian and me: How Olivier Rousteing is revitalising the house of Balmain

    Olivier Rousteing is revitalising the house of Balmain

    Parisian couturier Pierre Balmain made his name dressing the mid-century jet set. Today, Olivier Rousteing – heir to the house Pierre built – is celebrating their 21st-century equivalents. The result? Nothing short of Balmania
    Cancer, cardiac arrest, HIV and homelessness - and he's only 39

    Incredible survival story of David Tovey

    Tovey went from cooking for the Queen to rifling through bins for his supper. His is a startling story of endurance against the odds – and of a social safety net failing at every turn
    Backhanders, bribery and abuses of power have soared in China as economy surges

    Bribery and abuses of power soar in China

    The bribery is fuelled by the surge in China's economy but the rules of corruption are subtle and unspoken, finds Evan Osnos, as he learns the dark arts from a master
    Commonwealth Games 2014: Highland terriers stole the show at the opening ceremony

    Highland terriers steal the show at opening ceremony

    Gillian Orr explores why a dog loved by film stars and presidents is finally having its day
    German art world rocked as artists use renowned fat sculpture to distil schnapps

    Brewing the fat from artwork angers widow of sculptor

    Part of Joseph Beuys' 1982 sculpture 'Fettecke' used to distil schnapps
    BBC's The Secret History of Our Streets reveals a fascinating window into Britain's past

    BBC takes viewers back down memory lane

    The Secret History of Our Streets, which returns with three films looking at Scottish streets, is the inverse of Benefits Street - delivering warmth instead of cynicism
    Joe, film review: Nicolas Cage delivers an astonishing performance in low budget drama

    Nicolas Cage shines in low-budget drama Joe

    Cage plays an ex-con in David Gordon Green's independent drama, which has been adapted from a novel by Larry Brown
    How to make your own gourmet ice lollies, granitas, slushy cocktails and frozen yoghurt

    Make your own ice lollies and frozen yoghurt

    Think outside the cool box for this summer's tempting frozen treats
    Ford Fiesta is UK's most popular car of all-time, with sales topping 4.1 million since 1976

    Fiesta is UK's most popular car of all-time

    Sales have topped 4.1 million since 1976. To celebrate this milestone, four Independent writers recall their Fiestas with pride
    10 best reed diffusers

    Heaven scent: 10 best reed diffusers

    Keep your rooms smelling summery and fresh with one of these subtle but distinctive home fragrances that’ll last you months
    Commonwealth Games 2014: Female boxers set to compete for first time

    Female boxers set to compete at Commonwealth Games for first time

    There’s no favourites and with no headguards anything could happen
    Five things we’ve learned so far about Manchester United under Louis van Gaal

    Five things we’ve learned so far about United under Van Gaal

    It’s impossible to avoid the impression that the Dutch manager is playing to the gallery a little