Cheap ways of financing everyday spending

In August, credit card debt fell by £0.4 billion, falling for the fourth month running, while borrowing on loans and overdrafts rose by £0.2 billion, half the amount in the previous month. As long as you keep within your authorised overdraft limit, overdrafts can be a good way of managing your budget and your debt. Interest rates vary between 7.9% to 15.9% but overdrafts are flexible and you can borrow when you need the money and pay it back without paying a redemption fee. Some banks give you a free overdraft for a certain amount or period, which is always worth having.

With credit cards now about as popular as a turkey twizzler but a heck of a lot pricier, many borrowers are wondering where their next financial bargain is coming from. Interest rates on many credit cards have gone up substantially, by around 2% on purchases and 3% for cash withdrawals giving interest rates of around 15.9% and 24.9% respectively - and sometimes a lot more - so, quite naturally, we are turning away from them.

As credit cards fall out of fashion, our affections have turned to debit cards. In the first half of 2006, more than 70% of plastic card purchases were made with debit cards whereas in 2003 the split was about even. The jump in rates on credit cards appears to be the result of the ruling earlier in the year by the Office of Fair Trading OFT ordering credit card issuers to cut their penalty fees on late payments and the like to now more than £12.

To recoup their income, card issuers pushed up interest rates. The fact that we Brits are the heaviest borrowers in Europe owing an average of £3,175 each in unsecured debt, double the average in other countries, seems to be getting to us because unsecured lending has been falling as we pay off debt.

Consider the overdraft as a cash management alternative to the credit card. Some banks charge a fee for setting up your overdraft but if you go over your overdraft limit, beware - it can cost you dearly. The interest rate for going over your authorised limit is much higher often at around 30% and there is likely to be a fee to pay as well.

The other alternative is the combined current account which links your savings, mortgage and current account. Your mortgage and other personal debts are linked and you pay them both at the same interest rate and you can borrow when you need to. However, these combined accounts work best if you have substantial savings.