Banks, building societies and credit card companies may be offering attractive borrowing rates at the moment, but if you haven't got a near-perfect credit history, there's a good chance that your application will be declined.
Consumers are bombarded with adverts for payday loans, on television, online, in newspapers and on high street billboards, so it's no surprise that this is often the first port of call if the bank says no.
But just because your credit record isn't up to scratch, it doesn't necessarily mean you have to turn to a payday lender and face crippling interest rates of up to 4,214 per cent APR.
Although most mainstream credit card companies will turn you down flat if your history shows that you've missed a couple of credit payments or have a county court judgment recorded against you from a couple of years ago, there are credit cards out there that give you the chance to repair your credit record.
Credit cards from Luma, powered by Capital One, and Vanquis allow some people who have struggled with debt previously or who have a limited credit history a genuine opportunity to turn things round.
The interest rates are quite a bit higher than standard credit cards but are 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.
The maximum credit limit available when you first apply is £1,000 with Vanquis and £1,500 with Luma.
To put the costs into perspective, borrowing £400 on a Vanquis 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 at a representative APR of 4,214 per cent. If you borrowed £1,000 over 12 months on a 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 £1,204.92, an interest charge of £204.92.
To rebuild your credit status, you need to demonstrate a history of using a credit card in a responsible manner, so if you use the card and make payments on time every month then over time your credit score will get better.
If you repay the statement balance in full each month than it's even better as you'll be improving your credit score without paying any interest charges in the process.
You won't turn round your credit rating overnight, but it's an opportunity to prove that you are financially responsible and in time could give you the ability to again borrow at some of the lowest interest rates offered by banks and building societies.
Another more palatable option is a relatively new provider called Amigo loans offering credit of up to £5,000 at a representative APR of 49.9 per cent.
To qualify for an Amigo loan 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, then the guarantor becomes liable for the outstanding balance. Again the interest rate is far cheaper than going down the payday loans route. Another avenue worth exploring is borrowing from a local credit union.
With over 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 your money for those who are excluded from borrowing from high street banks. Some credit unions also offer the credit union current account, which comes with a Visa debit card with ATM access, or prepaid cards which can have your savings or loans loaded onto them for you to use at ATMs and in shops.
To find a local credit union visit www.findyourcreditunion.co.uk 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. 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, an interest charge of just £66.20.
If your finances are tight then a high-interest payday loan could see you end up in a much bigger financial mess, so only consider it if it's absolutely essential and as a last resort.
Andrew Hagger is an independent personal finance analyst from www.moneycomms.co.uk
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