Borrowing to pay household bills cannot be sustained

New research has raised concern at the number of people turning to payday lenders to cover essential monthly costs.

A study has revealed that 3 per cent of people in the Yorkshire and Humber region are falling back on these short-term loans in an "average month", borrowing £125 each per month to cover bills.

Local householders are borrowing less on payday loans than the national average, however, which the survey for Santander put at £153 per person.

Lower-cost borrowing in the form of overdrafts or credit cards is much more common in the region with 19 per cent and 10 per cent respectively choosing these options to cover gas, electricity, council tax, water and other household bills.

The researchers now say that thousands across the region could be paying over the odds for things like utilities as only 32 per cent of those surveyed said they regularly looked for better deals.

Reza Attar-Zadeh, banking director at Santander, said: "In an ideal world, household bills should be one of the first costs to be covered when payday arrives, but as the research highlights, this isn't always possible. The cost of living is going up, driven in part by the rising cost of household bills, and as a result, millions of people are regularly borrowing money to make ends meet which cannot be sustained in the long-run.

"The fact that only a third of people are regularly looking for ways to reduce their monthly bills is worrying, as there are a number of opportunities to bring these costs down that require very little effort or change. Discounts for paying by direct debit are widely available and using comparison sites can often knock considerable amounts off monthly bills."

But while 28 per cent of Britons now admit to relying on sources of borrowing - including credit cards – for the essentials each month, those who like to play it safe with their finances may still avoid ever spending on plastic, says MoneySupermarket. However, its financial experts say while the pitfalls of not using a credit card wisely and not paying off the balance are costly, leading to debt, careful consumers can use plastic to their advantage.

Here is MoneySupermarket's guide to the best ways to use a credit card.

A valuable form of protection

One great advantage of paying for something on a credit card is the protection it affords you as a consumer. Say for example, you made a major purchase such as an expensive piece of furniture, a car, holiday or new computer.

Before you received the goods, the company went bust and you were hit with the awful realisation that you could have lost all your hard-earned cash. But had you bought the items on a credit card, this wouldn't be the case.

This is because you would be protected by section 75 of the Consumer Credit Act which states that you are entitled to a full refund for items priced between £100 and £30,000 if a company goes bust or the goods are lost, stolen or damaged.

And if your item cost between £30,000 and £60,260 the more recently-introduced Consumer Credit Directive will cover that slice of spend to the same effect.

The really good news is that even if you only paid the deposit on credit card, you can still get the full amount back in the case of any of the above eventualities.

Cards that let you spread the cost for free

A credit card can also help you purchase a big-ticket item that would otherwise be out of reach, or take months to save up for. But don't plump for one that will charge you monthly interest.

Instead shop around for a credit card deal offering 0 per cent for a number of months. This way you can spread the cost of your purchase and pay it back in monthly instalments, without it costing you a penny in interest.

For example, the Tesco Clubcard Credit Card offers 0 per cent on purchases for a generous 16 months. If you are a Tesco customer it's handy as it doubles up as a Clubcard giving you five points for every £4 on Tesco shopping and one point for every £4 spent elsewhere.

However, make sure you have paid off your balance at the end of the 0 per cent period otherwise the interest would start piling on at a representative APR of 16.9 per cent (variable).

Another option is the Halifax Online All In One which offers a slightly shorter 0 per cent period at 15 months.

Cards that will pay you back

Some credit cards even reward you for spending by offering perks such as cashback or rewards.

Santander's 123 credit card for example, pays 3 per cent cashback on fuel spend (up to a limit of £9 a month); 2 per cent cashback on department store spend and 1 per cent cashback on spend in supermarkets, all in exchange for a good credit score and a £24 annual fee.

However the fee puts the representative APR at a hefty 22.8 per cent (variable) so you'll need to pay off your balance off every month. Cashback on the card is also capped at £300 a month.

If you are a frequent traveller, you may prefer to opt for a card that will reward you accordingly. For example, with the British Airways American Express Premium Plus card, you will get 1.5 Avios (formerly airmiles) for virtually every £1 you spend and three Avios for virtually every £1 you spend direct with British Airways or BA Holidays.

However, once the hefty £150 annual fee has been factored in, the card comes with a whopping representative APR of 50.1 per cent (variable). So, again, if you think that this card is for you, make sure you can pay the balance off each month.

Cards that will accept existing debt

Another way credit cards can help you manage your money is by finding a card that you can transfer current credit card debt onto. This is particularly useful if the debt is amassing interest and getting you caught in an expensive trap which can then be hard to get out of.

A credit card with the most generous interest free period on balance transfers is the Barclaycard Platinum with extended balance transfer.

This gives you 22 months to pay off your balance with no interest, allowing you to plan ahead and organise your finances. The representative APR after this period stands at 17.9 per cent (variable) so you would either have to make sure you had paid off the debt by that point, or move it again on to a different balance transfer card.

You won't be able to transfer the debt onto a card from the same provider though.

Qualifying for the top credit card deals

While a number of these cards are attractive, it's important to realise that you will only be accepted for the best deal if you have a good credit score. If you have a poor credit history and then get rejected after applying, you will only further damage your score.

There are two ways you can find out which cards you are likely to be accepted for. Using MoneySupermarket's smartsearch tool will give you an idea of the types of cards you could go for, but won't leave footprint on your credit file which is good news for further applications.

Or you may wish to get in touch with credit reference agency, such as Experian or Expedia and order a copy of your credit file. You can either sign up for monthly access which will give you a detailed view - also for a monthly fee - or you could order a copy of for your statutory report for £2.

Please note: Any rates or deals mentioned in this article were available at the time of writing.