By Elaine Wilcox, insolvency consultant at Armstrong Watson

Last updated at 16:15, Monday, 13 August 2012

Credit cards and payday loans are useful tools for making your money go further in the short term.

The basics

A credit card is a form of card-based borrowing from banks, building societies and some high street stores up to an agreed credit limit.

There is usually an interest free period in which to repay any sums borrowed for purchases on a credit card after which interest becomes payable.

A payday loan is a short-term advance designed to tide you over financially until payday. The loan is usually paid straight into your bank account, often within 24 hours of your application being approved. The repayment, plus interest or charges, is then taken directly from your bank account after your next pay day.

Potential benefits

Credit cards are useful for emergency purchases that you have not budgeted for within your normal monthly budget.

Credit cards also offer greater protection than debit cards in certain circumstances, under Section 75 of the Consumer Credit Act 1974. This enables you to claim directly from your credit card company where there has been a breach of contract for example, where goods haven’t been delivered, or where a retailer has subsequently entered insolvency proceedings after taking your order.

Payday loans are useful to cover expenditure for a short period until you get paid. Yet again it can help where an emergency purchase is required. The loan can be applied for online and the money paid speedily into your bank account.

Potential problems

Interest rates for borrowing on credit cards are often far higher than that of bank overdrafts or other short term loans. At present the average rate of interest on a credit card is approximately 12-19 per cent. Be wary of borrowing more on a credit card than you can afford to repay before incurring interest charges.

The typical charge for a payday loan is about £25 per month for every £100 borrowed. Advertised interest rates (APRs) can reach 2,000 per cent or more. Pre-approved extension periods (known as deferrals or rollovers) and increasing loan amounts on offer make this a tempting option but could leave you in an unmanageable debt situation.

Summary

Be wary of how you use a credit card and payday loans. Consider whether they are the best method of funding a purchase. Due to the high rate of interest on credit card and payday loans a failure to meet monthly repayments or extending the term of a payday loan can quickly lead to your debts snowballing.

Always prioritise the repayment of your debts to ensure that once mortgage payments have been met you are repaying liabilities with high rates of interest first.

Do not rely on obtaining credit as this can be just a short-term fix. It is better to look at your overall income and expenditure position and look at alternative ways of keeping within your budget. If you are having difficulties with your finances and need advice about managing your debt, email moneytalk@armstrongwatson.co.uk or call freephone 0800 195 2161.

First published at 14:07, Friday, 10 August 2012
Published by http://www.cumberlandnews.co.uk