Choose how to pay

For the first time since records began, the amount that the British are borrowing has been outstripped by the amount of debt we are repaying. It is symptomatic of a change in attitude that has seen the use of debit cards growing in recent years, while credit card numbers have fallen.

The chances are that you are one of the 42 million people – that is around 84 per cent of the UK adult population – who have a debit card. We used them for 43 per cent of all retail spending in 2008 and they are on course to overtake cash during 2009*.

Even so, it is surprising how little many of us know about the plastic that we rely on for everything from withdrawing cash to the weekly supermarket shopping.

Payment options

Debit cards come with most current accounts and are the main way we access our own money. When you use your card in a shop, online, over the phone, to withdraw cash or buy by mail order, what you spend is deducted from the balance in your account straight away.

That means it is easy to stay within your budget, as you can only spend the money in your account or authorised overdraft. It is also easy to check up on your spending by going through your monthly bank statement and comparing it to your receipts – and your spending targets.

Deferred debit cards also draw directly from your bank account but everything you spend apart from cash withdrawals over a given period – usually a month – is added together and deducted in one go.

Credit cards give you access to money loaned by the organisation that issues the card. At the end of a set period, usually a month, you must repay at least a fixed proportion of what you have spent and will be charged interest on the remainder. If you repay your monthly spending in full, there is no interest to repay. In some cases, there is a fee for having the card.

Charge cards allow you to use credit drawn from your charge account, rather than your bank or credit card account, but you must pay off the full amount every time you receive a statement, generally once a month. No interest is payable.

Prepaid cards are exactly what they say. You load them with money in advance and then use them just like any other card, with the amount you spend being deducted from the running total noted on the card itself. Some prepaid cards can be topped up with more money when they’re running low on funding.

Because there is no danger of overspending, prepaid cards are a good way of sticking to a budget. They also make popular gifts and can be used by children and teenagers as a first step in learning how to manage their money.

Cash. You do not need a bank account to use it but it is hard to keep track of spending and if it is lost or stolen, it is gone forever. If you rely on cash alone, you have to carry a lot of it all the time, which is a real security risk.

* UK Payments Administration, 2008

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