Money Insider: Play cards right to end payday loan misery

There are a growing number of credit cards on the market designed to steer some consumers back towards mainstream credit and away from the clutches of payday lenders.

Since the onset of the credit crunch, many people have seen their credit score damaged, often as a result of unemployment and circumstances beyond their control.

Those fortunate enough to have a job have seen little if any increase in pay over the last four years while soaring living costs continue to take a hefty bite out of any disposable income.

The upshot is that there are now many more people with a less-than-perfect credit score, which means they are often not eligible to borrow from banks and building societies.

Even though the best buy tables are littered with 0 per cent credit-card deals for 24 months-plus and personal loan rates at a ten-year low, unless you have a near-perfect credit history, you'll be wasting your time applying.

But put yourself in the position of someone who used to borrow from the big names on the high street but, since falling into arrears while out of work, suddenly finds they are no longer able to obtain credit from this source.

Where do you turn?

Despite there being a growing number of credit unions across the UK, it is the payday and doorstep lenders with aggressive high-profile advertising campaigns and a growing high street presence to which more and more people are turning – and paying a heavy price for their borrowing.

The only real way to get out of this situation is to take steps to repair your credit record and that's where the credit cards with a 35 per cent plus APR come in.

Most credit-card companies will turn you down flat if you've got a history of missed and late credit payments or a County Court Judgement.

However, specialist credit cards from Luma (powered by Capital One), Aqua and Vanquis enable UK customers who have struggled with debt previously or who have a limited credit history in the UK to apply for its plastic and give them a genuine chance to turn things round.

The interest rates are well below those charged for short-term payday loans with Vanquis charging a representative APR of 39.9 per cent, Luma 35.9 per cent and Aqua 34.9 per cent APR.

Borrowing £400 on a 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.

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, your credit score will get better over time.

If you repay the statement balance in full each month, then even better as you'll be improving your credit score without paying any interest charges in the process.

Rebuilding your credit rating will never have a quick fix but this is a real chance to prove that you are financially responsible, and in time could give you the ability to borrow once again at the prime interest rates offered by banks and building societies.

I'm not suggesting that borrowing at 35 per cent to 40 per cent APR is an ideal situation, but when your options are limited, it looks a hundred times better than potential payday loan hell.

NS&i and Coventry in a welcome pledge on ISA interest rates

It's a longstanding gripe that new customers are tempted to put their cash into a best buy savings deal, only to find that 12 months later the rate gets slashed to next to nothing.

However, two providers have just announced plans to do away with dual pricing, and will offer all ISA customers a decent deal.

National Savings & Investments (NS&I) says that from 25 May customers in old T Cash and Cash ISA products paying a miserly 0.5 per cent will be switched to the NS&I Direct ISA paying 2.25 per cent.

Coventry Building Society, meanwhile, says that from 6 April all its ISA customers will receive a variable interest rate of 2.5 per cent.

Andrew Hagger is a personal finance analyst at moneycomms.co.uk